The European Central Bank will not revisit its decision to raise interest rates by 25 basis points at its July 21 meeting but the size of its September hike is still to be decided, ECB Chief Economist Philip Lane said.
With many of its peers, particularly the US Federal Reserve, raising rates quicker than anticipated, pressure is growing on the ECB to quicken the pace of its own "normalisation" to fight off a surge in inflation that was now at risk of getting entrenched.
But Philip Lane, the chief architect of the ECB's policy decisions, said he saw no reason to reopen the debate about July and instead, any surprises about inflation would be reflected in the September move.
"I think it's enough to say that the size of the September increment will reflect our ongoing or evolving assessment, rather than revisit the size of the increment in July," Professor Lane said.
He made his comments at the annual dinner of Britain's Society of Professional Economists in London last night.
Meeting earlier this month, the ECB said that unless the inflation outlook improved, it would have to lift rates by more than 25 basis points in September, a deliberately vague formulation that gives policymakers some leeway.
While several conservative members of the rate-setting Governing Council have already made the case for a 50 basis point move, others have cautioned that other, smaller moves, are also possible.
Inflation hit a record high 8.1% last month and could still go higher in the coming months, raising the risk that workers start demanding bigger pay increases, entrenching high inflation via a hard-to-beat wage-price spiral.
Such rapid price growth could fuel "inflation psychology," Professor Lane said, referring to a phenomenon when consumers and businesses adjust their habits in anticipation of higher prices.
Once inflation psychology sets in, consumers bring forward their spending to beat the rise in prices while businesses start lifting their own prices, expecting higher costs, with both behaviours perpetuating inflation.
"We have very high inflation rates now, and clearly we could be in a world where inflation psychology is taking hold," Philip Lane said.