ECB: A “smart” step: Chief economist Lane prepares markets for further interest rate hikes

An interest rate hike by the ECB before the end of the year is becoming increasingly likely. Chief Economist Lane reiterates the central bank's recent position. He also comments on the situation in France.

Philip Lane: The inflation rate in the euro area is currently well above the ECB target. Photo: Bloomberg

Frankfurt. In view of the increasing risk of inflation in the euro area, the European Central Bank (ECB) is probably heading for a third interest rate increase this year, according to its chief economist Philip Lane. Such a step would be “wise” if the data situation does not change by the interest rate meeting in December, the Irishman told Bloomberg TV on Tuesday. At the end of the year, an inflation rate of “a little” above four percent is expected.

The high energy prices have already pushed inflation in the euro area to its highest level in more than three years, putting the ECB under pressure: consumer prices rose by 4.0 percent in October, after 3.8 percent in September.

The ECB is aiming for an inflation rate of 2.0 percent. She recently warned of increasing risks of inflation in connection with the ongoing oil price shock resulting from the Iran war.

The central bank already raised the key interest rate in June and September: After recently leaving the deposit rate at 2.50 percent, it is likely to continue to combat price increases in December. ECB boss Christine Lagarde recently emphasized that unless there were “major developments,” the direction of monetary policy was “pretty clear for all of us.”

Signals in this direction recently came from Bundesbank chief Joachim Nagel. He called a rate hike in December “very likely necessary from today’s perspective.” The ECB Council member emphasized that the inflation outlook had recently deteriorated.

Lane to France: The solution to the problem lies in Paris

ECB chief economist Lane also spoke about the fiscal situation in France and the associated increase in yields. Looking at the bond market's reaction, there is "uncertainty about France's fiscal outlook," Lane said. “The problem must be solved in Paris.”

The yield on ten-year French bonds recently rose above the five percent mark for the first time since 2002. The higher refinancing costs make the necessary fiscal consolidation more difficult and contribute to the already tense situation. Lane rejected intervention by the ECB.

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