The recent turmoil in the euro zone bank sector is likely to dissipate and European Central Bank interest rates will then have to keep rising to contain inflation, ECB chief economist Philip Lane told a German newspaper.
Professor Philip Lane said that banks were well capitalised with ample liquidity so there is no direct read-across from US and Swiss banking tensions to the 20 nation currency bloc.
"Under our baseline scenario, in order to make sure inflation comes down to 2%, more hikes will be needed," Die Zeit quoted Lane as saying today.
"If the financial stress we see is non-zero, but turns out to be still fairly limited, interest rates will still need to go up," he said.
Philip Lane argued that even if inflation is still high, earlier stages of production show moderating price pressures and these will eventually feed through to consumer prices.
"If you look at the earlier stages of production, at the farm gate prices, at the prices of the food ingredients, you will recognise: all of these have turned around," Lane said.
The ECB has raised rates by a combined 350 basis points since July but has provided no guidance for its May 4 meeting on account of the financial turmoil.
Professor Lane added that a recession is not necessary to bring inflation down and a soft landing of the economy was possible.
"We've lost so much growth momentum in the pandemic that it’s possible for the pandemic recovery to continue and for inflation to come down simultaneously," he said.
