ECB’s Lane: Drags on growth may limit need for ECB action

European Central Bank chief economist Philip Lane highlighted during the Reuters NEXT Europe 2026 summit that slowing growth could limit the need for further monetary tightening to address price pressures. Lane explained that surging energy costs, reduced budget support, and the surge in market-based borrowing costs are weighing on the economy and could curb demand.

Despite growth remaining steady this year, the fiscal impulse is expected to shift from positive in 2026 to negative in 2027 and 2028. Additionally, long-term interest rates have seen significant increases, further slowing growth and reducing anticipated pass-through. While AI-related investment is a positive for the economy, heavy borrowing by tech companies has contributed to upward interest rate pressure.

Lane emphasized that under normal circumstances, these 'demand destruction' factors could limit the necessary adjustments to monetary policy to bring inflation back to the target. However, he did not comment on the upcoming policy move, stating that decisions will be made on a case-by-case basis. Financial markets anticipate two to three more rate hikes from the ECB in the next year, but these projections are highly volatile, having been fully priced in just a week ago before a swift adjustment.

Lane also noted the absence of an upward shift in medium-term inflation, despite the recent near-term surge, a stance backed by Bundesbank President Joachim Nagel. Nagel suggested that there have been no signs of inflation spilling over into price and wage setting. Long-term market expectations and expert forecasts continue to align with the Eurosystem's 2% inflation target, though Nagel cautioned that upward risks to inflation remain due to potential further natural gas price hikes, refinery capacity destruction, and upward pressure on food prices.