Chief economist Lane says ECB may need to hike rates again in May

ECB chief economist Philip Lane said the lowest-paid households suffer disproportionately from soaring prices and it was important to rein in inflation.    

The European Central Bank chief economist Philip Lane has kept the debate over future interest rates boiling, saying rates may need to up again next month if inflation develops along the path seen before the eruption of turmoil for banking markets.      

Mr Lane, the former governor of the Central Bank of Ireland, told the Cyprus News Agency the ECB would also weigh the recent spike in global crude oil prices, as well as the drop in wholesale gas prices, in its decision-making.    

The ECB has raised rates by a combined 3.5% since July but did not provide specific guidance for its May 4 meeting, arguing that turbulence in the financial sector required extra caution.

"If the baseline we developed before the banking stress holds up, it will be appropriate to have a further increase in May," Mr Lane said in the interview. "However, we need to be data-dependent about the assessment of whether that baseline still holds true at the time of our May meeting," he said. 

Oil prices

Mr Lane said the ECB will weigh the effects of the spike in crude oil prices in recent days, but noted that oil prices had previously fallen in recent months, adding that "we've seen a very large ongoing reduction in gas prices, and the reduction in pressure from energy reduces the pressure on the rest of the economy". 

"Last year we had a lot of pressure on many sectors, because their utility bills went up so much," Mr Lane said. 

"This year, with gas really improving quite a bit and with oil declining until quite recently, this will also relieve pressure on many sectors. So this is why it is really quite uncertain. This is why the data inflow is so important, because it’s possible to debate many possibilities, and we really have to see, in an overall context, the net impact of these dynamics," he said. 

Largely repeating his stance, Mr Lane argued that the May decision will depend on the inflation outlook, the bank's assessment of underlying price dynamics, and on how quickly past rate hikes are impacting the economy. 

Markets have fully priced in a quarter-point increase in the 3% deposit rate on May 4 and see another quarter-point move by mid-year, a downgrade from a month ago, when twice as many rate increases were expected.

Yields

A sharp drop in expectations for future official rate hikes by the ECB and the US Federal Reserve has sent eurozone and US government bond yields — which reflect the implied cost for governments to borrow — sharply lower.

The yield on the Irish 10-year bond was trading at 2.63% late yesterday, down by 0.5% in the month, according to Trading Economics. That compares with Germany's 2.17% and the US yield of 3.26%, which have also dropped.          

Although bank shares are down by about a tenth over the past month, volatility has receded, and underlying inflation, a key worry for policymakers, continues to accelerate, strengthening the case for rate hikes. 

In the interview, Mr Lane said the lowest-paid households suffer disproportionately from soaring prices and it was important to rein in inflation.    

"Here and elsewhere, those that suffer most from high inflation are those on low incomes, who right now are facing very high food prices and still absorbing the increase in electricity and gas prices last year. It’s in everyone’s interest not to allow inflation to remain too high for too long," he said. 

Additional reporting Reuters