ECB Chief Economist Philip Lane said yesterday, “we have very high inflation rates now, and clearly we could be in a world where inflation psychology is taking hold.”
In a presentation, he said that Eurozone is facing three inflation shocks: pandemic cycle, energy shock and Russia-Ukraine war. Risks to inflation outlook include catch-up adjustment in wages, re-set of long term inflation expectations, inflation psychology, downward revision in potential output, and rise in real interest rate.
He added that monetary policy normalization is “appropriate” with “clear and robust” initial steps. That is, ECB will be stopping asset purchases, raise interest rate by 25bps in July, and again in September. Though, the size of the September hike is undecided. As for further steps, they will be state-contingent (gradualism, optionality, flexibility, data-dependency)
