Philip Lane urges Irish firms to plan for changing financial conditions

Comments ahead of ECB meeting where a further interest hike of 0.25% is expected

Philip Lane said we all want to get back to a situation where we don't have to think about inflation. 

Firms need to think more about the changing financial conditions they face given the uncertainty due to inflation and rising interest rates, the European Central Bank’s (ECB) chief economist Philip Lane has said.

His comments come ahead of a meeting of the ECB at the start of next month where a further interest rate hike of 0.25% is expected. 

Since last summer, the ECB has raised interest rates by 3.5% as they try to get a handle on inflation.

Mr Lane spoke at a summit organised by Enterprise Ireland where he emphasised that the ECB has not seen an interest rate hiking cycle or levels of inflation like this before.

“We're very data-dependent in deciding what we're going to do in our upcoming meetings. But one of the big indicators we are going to be tracking is the financial conditions facing firms,” he said.

This is really something I think every firm has to think about.

"I know that a firm should really focus mostly on its own core business, but it is a very large change in financial conditions and I encourage all of the businesses that Enterprise Ireland supports to think quite a lot about navigating this situation.” 

He said that interest rate increases also have an impact on not just the financing of firms but also on the demand profile of customers who may not want to spend as much if they are also considering the implication of rate hikes.

Mr Lane added that a recent survey of market analysts carried out by the ECB indicates that they believe interest rates will rise further in the near term and remain at elevated levels for an extended period of time.

It also found that the analysts don’t believe the ECB is going back to the days of very low interest rates.

Mr Lane said it is “very much in the interests” of the enterprise sector to see inflation stabilised as “high and volatile” inflation makes it difficult to manage costs, set prices correctly, and make plans for the coming years. He said:

We all want to get back to a situation where inflation is so low and stable, we don't have to think about it.” 

Mr Lane said that this year there has been a “sizable improvement” in supply bottlenecks as well as a “significant reversal” in energy prices which had been keeping inflation high.

He said it looks “fairly reassuring” that inflation is going “to be eased quite a bit”.

Despite the difficulties facing Europe at the moment, Mr Lane added that the ECB still believes that the euro area will “grow quite a bit in the coming years” even as inflation comes down.

Mr Lane said that this is contrary to commentary that inflation only comes down when there is a recession, the ECB expects the European economy as well as the world economy to grow while inflation reduces.

However, Mr Lane said that there has been a “big deceleration” in banks offering credit to businesses since the middle of last year which is a mix of firms borrowing less and banks deciding to lend less.

“This is a very important quantitative metric of how much this will slow down the economy in the months to come.”