The economic fallout from the Covid pandemic remains a key driver of rising inflation, and new lockdowns currently in place in China are adding to those pressures, European Central Bank chief economist Philip Lane has warned.
Speaking to influential Brussels think tank Bruegel, the former governor of the Central Bank of Ireland said the pandemic remains “a first-order driver” in the inflation now plaguing households and businesses, and which the ECB is mounting pressure to contain.
Mr Lane’s cautious speech contrasted factors such as the risk of persistently high inflation – which the ECB was expected to address by raising interest rates to curb spending – with those of a slowdown in business and consumer sentiment, partly fueled by the war in of Ukraine – something that could justify maintaining monetary support for the economy.
Lockdowns in China are an added dimension as the initial shutdown and stop-start reopening of much of the global economy in 2020 and 2021 is a key driver of rising inflation, particularly in energy prices.
“Current restrictions in China are contributing to another wave of bottlenecks in global supply chains and limiting domestic demand in a key region of the world economy,” Mr Lane said.
He spoke about how to deal with inflation against the backdrop of divisions within the ECB.
Finland’s central bank governor Olli Rehn yesterday called for several rate hikes within months to fight inflation.
“I think it would be justified to raise the deposit rate by 0.25 percentage points and by autumn it would be zero,” the former EU commissioner said in an interview with Finland’s Helsingin Sanomat.
“The next year looks challenging and the worst-case scenario is that the eurozone faces a recession, so we should not delay the normalization of monetary policy,” Rehn said.
In contrast, ECB Executive Board member Fabio Panetta, an Italian economist, warned that such a move could hurt growth even if the economy is already in a slowdown.
“This complicates the decisions the ECB faces, as monetary tightening aimed at curbing inflation would ultimately hamper already flagging growth,” he told Italian newspaper La Stampa.
Most economists seem to believe that the ECB’s first rate hike since 2011 could come in July.
https://www.independent.ie/business/philip-lane-sets-out-the-risks-as-ecb-top-brass-waver-over-rate-hikes-41618808.html Philip Lane discusses the risks of ECB tips vacillating over rate hikes