Although inflationary pressures in the Eurozone have eased recently, the ECB’s chief economist believes that rate hikes will continue until the central bank is certain that inflation will return to its target rate of 2%.
According to European Central Bank Chief Economist Philip Lane, rising interest rates are having a cooling effect on the cost of services and other “core” commodities (those not directly affected by market fluctuations, such as volatile fuel and food).
The ECB has raised interest rates by three percentage points since July and promised another half percentage point increase in March in the hopes that the higher cost of borrowing will slow inflation from its current rate of over 8%.
In an interview with Reuters, Lane said, “There’s significant evidence that monetary policy is kicking in.” Many leading economic indicators suggest that energy, food, and commodities inflation pressures will ease significantly in the near future.
Lane suggested three requirements that could halt the ECB from hiking rates. The central bank must both reduce inflation expectations across its three-year forecast horizon and achieve tangible reductions in underlying inflation. After all is said and done, it must decide if monetary policy is successful.
Concerns that core inflation has stalled have led markets to anticipate a hike in the ECB’s current deposit rate of 2.5% to roughly 4% by the end of the year. This peak rate estimate has increased by around 35 basis points just this month.