FRANKFURT, Oct 5 (Reuters) – The late summer surge in energy costs could be a drag on growth and such ‘demand destruction’ episodes can limit how much a central bank must tighten policy to quell price pressures, European Central Bank chief economist Philip Lane said.
The ECB has raised interest rates twice this summer and markets see another two to three moves in the coming year on fears this increase will set off second-round price effects.
Lane said underlying inflation indicators suggest that an upward shift in medium-term inflation has not taken hold and while growth has been surprisingly resilient, partly on government spending and AI investment, high energy costs could take their toll.
“This second wave of the energy supply shock poses direct upside risks to the inflation outlook but also downside risks to the growth outlook,” Lane told a conference on Monday.
“All else being equal, these ‘demand destruction’ channels can limit the required adjustment in the monetary stance to ensure the timely return of inflation to the target,” he said.
While government spending was insulating the economy, the fiscal impulse is expected to decline in the coming years, adding to the drag on growth.
“Taken together, this means that we remain in the ‘middle path’ for monetary policy, in which a measured response is appropriate to keep inflation in check,” he said.
(Reporting by Balazs Koranyi; Editing by Alexandra Hudson)
