The European Central Bank must raise interest rates to a level that starts to restrict growth and their peak will depend on how the economy responds to the most rapid policy tightening cycle on record, ECB chief economist Philip Lane told the Financial Times.
The ECB has raised rates by a combined 2.5 percentage points since July in an attempt to arrest a historic surge in inflation, but policymakers have already said that more will be needed get price growth, now just below 10%, back to the ECB's 2% target by around 2025."Last year we could say that it's clear that we need to bring rates up to more normal levels, and now we say, well, actually we need to bring them into restrictive territory.
Lane also said that euro zone governments, which are spending too much on subsidies now, will have to take on a bigger role in fighting off inflation. Inflation will rapidly ease this year but much of this will be due to a "base effect" as the gas price surge gets knocked from year earlier figures and the difficulty may be in ensuring the final phase of disinflation.
Once rates are high enough to restrict growth, the ECB will need to balance the risk of doing too much versus doing too little and this may be an issue that drags out for the "next year or two," Lane said.
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