ECB Chief Economist Philip Lane reiterated in a speech today that monetary policy will remain data-driven and meeting-by-meeting, with “no pre-commitment to a particular rate path.” He emphasized said the ECB’s policy decisions will hinge not only on the baseline inflation forecast but also on “shifts in the risk distribution”.
The downside inflation risks outlined in September include a stronger Euro, weaker export demand caused by higher global tariffs, and the possibility of rising market volatility linked to trade tensions.
Conversely, Lane highlighted several upside risks that could keep inflation elevated. These include “fragmentation of global supply chains”; surge in defence and infrastructure spending that boosts medium-term demand; and climate-related disruptions.
He elaborated that persistent Euro movements tends to have “multi-year impact” on both inflation and growth, with the size of the impact depending on its source. Appreciation stemming from external weakness or capital flows tends to depress inflation more sharply. On the other hand, changes driven by domestic demand strength or domestic risk premiums carry a smaller inflationary force.
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