ECB Chief Economist Hints at Possible Further Rate Hike: Inflation Risks Not Yet Dissipated

After the European Central Bank raised its key interest rate to 2.25% in June, the market initially expected the tightening cycle to be nearing its end. However, Chief Economist Philip Lane recently made it clear that if inflation evidence points to sustained pressure, the central bank may raise rates again. This stance highlights that inflation stickiness in the eurozone is far greater than expected, and the aftershocks of energy price shocks are still spreading.

Energy Prices and the Inflation Transmission Mechanism Lane pointed out that although a potential peace agreement between the U.S. and Iran could ease tensions in the Middle East, energy prices have not returned to pre-conflict levels. Crude oil and natural gas prices remain significantly higher than the baseline at the end of 2025, directly driving up production and transportation costs, which are then transmitted to consumer goods through supply chains. Core inflation in the eurozone has fallen from its peak, but services inflation and rising service costs remain stubborn, partly due to wage growth supporting prices.

The ECB's analysis shows that while the direct contribution of rising energy costs to overall inflation is weakening, their indirect effects (such as companies passing on costs) may last longer. Lane emphasized that monetary policy decisions need to rely on data, not a predetermined path. He did not rule out the possibility of another rate hike at the September meeting or later, provided that inflation expectations and actual data deteriorate.

Deepening Divergence within the Eurozone Economy This hawkish signal comes at a time when economic divergence within the eurozone is intensifying. The Bundesbank recently downgraded its growth forecast while raising its inflation forecast, indicating a coexistence of a sluggish manufacturing sector and resilient services. Italy and Spain are under pressure from rising debt costs due to higher interest rates, while France faces challenges from a widening fiscal deficit. The ECB faces a difficult balancing act between continuing to raise rates and avoiding excessive tightening.

The divergence from the Fed's path also draws attention. The U.S. Federal Reserve held steady in June, and the market expects it may pivot to rate cuts within the year. The ECB's independent rate hike stance could strengthen the euro, further dampening export competitiveness, but the central bank itself is more focused on domestic price stability. The Bank of England is expected to keep rates unchanged, forming a pattern of policy divergence among the three major central banks.

Monetary Tightening from a Global Perspective From a global macroeconomic perspective, further rate hikes by the ECB would exacerbate the tightening of global liquidity. Emerging markets may face capital outflows and depreciation pressures on their currencies, especially those dependent on energy imports. Although geopolitical risks have eased temporarily, supply chain restructuring and energy transition costs continue to support long-term inflation.

Lane's remarks also reflect the central bank's vigilance regarding the "last mile" of inflation. Historical experience shows that easing policy too early could lead to a rebound in inflation, forcing the central bank to raise rates more aggressively. The ECB may be learning from the stagflation lessons of the 1970s, preferring to keep the option of a rate hike open rather than repeat past mistakes.

Looking ahead, the ECB's decisions will heavily depend on wage negotiation results, corporate pricing behavior, and energy market developments. If the summer tourism season accelerates services inflation again, or if recurring tensions in the Middle East push up oil prices, it cannot be ruled out that the ECB will act again in the fall. Investors need to reassess expectations for peak eurozone interest rates and keep an eye on economic data ahead of the September meeting.