European Central Bank Chief Economist Philip Lane said the Frankfurt institution will have to remain vigilant over the coming months with the prospect of inflation spiraling ever higher alongside the risk of a consumer-led slowdown the region.
“With the uncertainty, we have to manage the two risks,” Lane, who is also a member of the bank’s Governing Council, told CNBC’s Annette Weisbach Tuesday at the ECB’s Sintra Forum in Portugal.
“On the one side, that could be forces that keep inflation higher than expected for longer. On the other side, we do have the risk of a slowdown in the economy, which would reduce inflationary pressure,” he added.
“So it’s very much having a clear vision for the next couple of meetings, having an orientation to move away from the very low rates we’ve had for quite a few years, but also fully respecting the importance of being data dependent. And to retain the optionality to respond to what we see, in the coming months.”
All eyes are on the ECB with a critical meeting next month. The central bank has said it will be raising interest rates for the first time in 11 years, but investors are more interested in understanding what the ECB is doing to address fragmentation risks in the region.
The euro zone’s central bank held an emergency meeting earlier this month as borrowing costs surged for the so-called peripheral European nations. The ECB said it would be developing a new tool to address these risks — however, markets were left wondering when the tool would be implemented and how far it would go.
These conversations come at a time when there’s widespread concern about the euro zone economy. Inflation is high and the growth outlook is deteriorating.
“Can you really hike interest rates into a recession even if inflation is high? That would be unusual,” Erik Nielsen, the global chief economist at UniCredit, told CNBC Tuesday.
The ECB confirmed in early June its intention to hike rates next month and then again after the summer. This would likely bring the ECB’s deposit rate back out of negative territory and mark a massive moment for the central bank, which has kept rates below zero since 2014.
However, there are questions on whether Lagarde will follow through with multiple rate hikes with the region’s growth outlook darkening.
The ECB in June forecast a GDP rate of 2.8% for the euro zone this year, but economists are starting to talk about the prospect of a recession toward year-end off the back of Russia’s invasion of Ukraine and the impact that’s having on the global economy.