ECB’s Lane says moving too quickly on rates would trigger ‘large recession’

European Central Bank chief economist Philip Lane laid out the case over the weekend for incremental interest rate increases from here into next year to fight inflation, saying moving too quickly “basically involves a really large recession”.

“We do think we can get inflation to 2 per cent pretty quickly,” Mr Lane told the Dublin Economics Workshop conference in Wexford on Saturday evening. “If you do it too quickly, it basically involves a really large recession — you’d have to raise interest rates a lot, very quickly.”

He added that the ECB wants to get back to about 2 per cent, its official target, “in a timely manner”.

The ECB has characterised its decisions to raise interest rates by 0.5 of a percentage point in July, followed up by a record 0.75 point move earlier this month, represent a “front-loading” of rate hikes to try and get in advance of soaring inflation.

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While inflation is being driven by surging fuel prices in the wake of Ukraine war, it has also been fuelled in recent times by demand, a factor that was not evident late last year, when the ECB was resisting rate increases.

ECB president Christine Lagarde said at the time of the latest increase, on September 8th, that a further two to five hikes will take place over “several meetings” of the organisation’s governing council to try to rein in rising house prices.

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A neutral central bank deposit rate — where the ECB is neither stimulating or holding back economic growth — is largely viewed by economists to range between 1.5 per cent and 2 per cent. The official ECB deposit rate currently stands at 0.75 per cent, following the two recent moves, and financial markets see it peaking early next year at just over 2.5 per cent.

Financial markets also see the euro-zone rate of inflation falling back to about 2 per cent by the middle of 2024, Mr Lane noted.

The ECB moved earlier this month to lower its real euro-zone gross domestic product (GDP) growth forecast to 0.9 per cent from 2.1 per cent, driven by an increase in its inflation expectations.

Mr Lane said in a separate interview with RTÉ from Wexford that the euro-zone economy is likely to flatline over the winter months and a recession could not be ruled out given high energy prices and a shortage of natural gas.

“If we think our base case is to barely grow, a technical recession — falling into a mild recession — cannot be ruled out,” he said.