ECB officials spar as Philip Lane rebuffs talk of September rate hike

European Central Bank chief economist says 'September will be decided in September, July will be decided in July'

ECB chief economist Philip Lane's comments contrasted sharply with those of executive board member Isabel Schnabel, whose speech in focused on the dangers to consumer prices. File picture

European Central Bank officials revealed a sharpening divide on the outlook for interest rate hikes: Some favour caution while executive board member Isabel Schnabel insisted this is no time for complacency.

With an increase in borrowing costs already pencilled in for the July 27 decision, chief economist Philip Lane and the Slovak and Lithuanian governors said there’s no urgency in committing now about what to do at the meeting on September 14.

However, Ms Schnabel struck a worried tone on the inflation outlook. In remarks chiming with hawkish colleagues who suggested the probable need for a September hike, she said officials should “err on the side of doing too much rather than too little.”

The intensifying public debate after last week’s quarter-point rate increase underscores how ECB officials are approaching their summer break in August disagreement over the inflation risks threatening the euro zone.

While some are in no mood to relax, others can’t see the point in binding themselves to a potential move almost three months away.

“September will be decided in September, July will be decided in July,” Mr Lane said in Madrid. 

It looks like another hike in July will be appropriate. And then basically we will see in September — that’s months away in terms of all the data we’re going to learn about between now and September. 

"We’ll also have a full scale forecasting round.”

The remarks by Mr Lane, champion of the ECB’s “data-dependent” approach to its rate decisions, contrasted considerably with those of Ms Schnabel, whose speech in Luxembourg focused on the dangers to consumer prices.

“Risks of both a de-anchoring of inflation expectations and weaker monetary policy transmission suggest that there is a limit to how long inflation can stay above our 2% target,” she said, warning that labor demand “remains exceptionally strong”. She added: 

Put differently, one of the key channels in policy transmission — if not the most important one — is currently not working as usual.

The comments put her firmly in the hawkish camp of the governing council, along with colleagues such as Bundesbank president Joachim Nagel. He said on Friday that rates may need to keep rising “after the summer break,” while Belgium’s Pierre Wunsch cautioned that hikes will continue even beyond September if core inflation doesn’t slow down.

The measure, which strips out volatile components such as energy and food, slowed to 5.3% in May but remains well above the ECB’s 2% goal. ECB chief Christine Lagarde said last week indicators of underlying inflation “remain strong” and show only “tentative signs of softening.”

Mr Lane was more circumspect: “What the market is confident in, and I think correctly because we’ll have something to do about it, is that inflation will come down to our target fairly quickly in the next couple of years to 2% thereabouts,” he said.

• Bloomberg