Lane: Inflation outlook uncertain, policy response open

ECB Executive Board Member Philip R. Lane noted that the macroeconomic outlook has worsened due to factors related to the Iran war, leading to increased uncertainty and a drag on consumption and investment in the euro area.

He highlighted that oil prices have remained above the March projections, contributing to upward pressure on inflation.

Lane indicated that the ECB is likely to make a further upward adjustment to its inflation forecast at the June Governing Council meeting.

He expressed concern about the risk of more persistent medium-term inflation dynamics, particularly if indirect effects beyond energy prices, such as firms raising prices, broaden into a wider inflation problem.

Lane emphasized that the duration of the conflict is crucial in determining how these channels unfold, and the central bank remains in 'monitoring mode' regarding potential second-round effects.

ECB Executive Board Member Philip R. Lane outlined three potential scenarios for the central bank's monetary policy response to energy supply shocks.

These range from 'looking through' a small, temporary impact to a stronger reaction if the shock becomes large and broad.

He reiterated the ECB's principle of non-pre-commitment, emphasizing that future decisions will remain data-dependent.

Lane contrasted the current environment with 2022, noting that today's demand conditions in Europe are not strong, and the central bank entered the current shock from a broadly neutral policy stance.

He also briefly discussed the stability of the European bond market, supported by the EU fiscal framework, and the importance of further capital market integration.