ECB Chief Economist Philip Lane said in a speech that risks to the inflation outlook are “primarily on the upside”. Major short term risk is a “further disruption of energy supplies”. Over the medium term, inflation may turn out to be higher than expected because of a “persistent worsening of the production capacity”, further increases in “energy and food prices”, and rise in “inflation expectations above our target” or higher “anticipated wage rises.
“In the context of a long projected period with inflation far above target, the net upside risks to inflation and taking into account that the current setting of the key policy rates is still highly accommodative, it was appropriate to take a major step that frontloads the transition from the prevailing highly-accommodative level of policy rates towards levels that will support a timely return of inflation to our target,” he said, about last week’s 75bps rate hike”.
“In calibrating a multi-step transition path, the appropriate size of an individual increment will be larger, the wider the gap to the terminal rate and the more skewed the risks to the inflation target, he added.
