The European Central Bank may have delivered its June rate hike, but its policymakers are already making the case for why the tightening cycle may not be over. Speaking in Paris today, Chief Economist Philip Lane dismissed suggestions that the ECB should have paused this month, arguing that “it would be very hard to make the case we should have stayed” at 2%. In his view, inflation remains too high, while the Eurozone’s economy and financial system have shown enough resilience to absorb higher borrowing costs.
More importantly, Lane offered fresh insight into how the ECB’s thinking on interest rates is evolving. Earlier this week, he revealed that the upper end of the Bank’s estimate of the neutral interest rate has increased from 2.25% to 2.50%. While neutral rate estimates are inherently uncertain, the shift suggests policymakers see less risk that current policy settings are excessively restrictive. It also implies there may be additional room for tightening if inflation proves more stubborn than expected.
That concern is increasingly centered on services inflation. Belgian central bank governor Pierre Wunsch pointed directly to May’s jump in Eurozone services inflation from 3.0% to 3.5%, describing it as a “not-so-nice reading.” Wunsch warned that if similar data continue to emerge, another 25 basis point increase could be warranted. “Maybe you want to hike another 25 basis points to be on the safe side,” he said, before cutting rates later once inflation pressures begin to recede.
The message from both officials is clear: the ECB is not preparing markets for another immediate move, but neither is it signaling that rates have peaked. Wunsch said he would be comfortable waiting until September only if incoming data remain inconclusive. Otherwise, “if the data is not going in the right direction, I would plead for a second hike and not for waiting.” With services inflation and wage growth now replacing energy prices as the primary concern, the debate within the ECB appears to be shifting from whether rates are restrictive enough to whether inflation is proving persistent enough to justify another increase.
