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ECB Chief Economist Links Inflation to Energy Shock
Confirmed
In Short: In an interview with ANSA, European Central Bank (ECB) Chief Economist Philip Lane said that the current high interest rates are primarily due to the inflationary pressures caused by the energy shock.
Lane noted that while energy prices are high, the extent to which these prices are affecting the broader economy remains uncertain.
He also acknowledged that artificial intelligence (AI) could support economic growth in the medium term, but overall, his speech leans slightly dovish for the Euro, underscoring uncertainty about inflation persistence and future fiscal tailwinds.
Minneapolis Federal Reserve President Neel Kashkari, in a separate interview with Fox News, argued that inflation is too high across all sectors of the US economy, not just in oil prices.
Kashkari emphasized that even after excluding volatile categories like energy and food, inflation remains too high and that the Fed's job is to bring it back to its 2% target.
Kashkari pointed out that inflation is widespread in the services sector and that the Fed has tools to address this issue.
The Bank of England is under pressure to raise interest rates amid a global bond market rout, with concerns over sticky inflation and runaway government borrowing.
Anthony Brinkman, high yield portfolio manager at Principle Asset Management, warned that failing to act could risk the Bank losing credibility.
James Carter, co-head of fixed income at W1M, added that investors would continue to charge a higher price for holding government debt if the Bank of England does not hike rates and fails to communicate its long-term trajectory convincingly.
The ECB and the Bank of England are both facing similar challenges, with both central banks raising interest rates by 25 basis points last week and signaling that future decisions will depend on incoming economic data.
What this adds
The impact of AI on economic growth is a new consideration in the discussion.
The focus on services inflation by Kashkari suggests that core and services inflation data may carry as much weight as oil for rate expectations.
What's confirmed
- For crude, the direct effect is limited, so prices are likely to keep following Hormuz and Saudi pipeline headlines, though higher borrowing costs colliding with an energy shock raise the risk of weaker demand over time.
What's still developing
- European Central Bank (ECB) Chief Economist Philip Lane said in an interview with ANSA, released during the European trading session on Tuesday, that energy shock-led inflationary pressures are key driver to the high interest rates narrative.
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- Main driver of the interest rate decision has been the inflation implications of the energy shock.
- Speaking to Fox News' Sunday Morning Futures, he said that even after stripping out energy and food, which he described as volatile categories that still matter a great deal, inflation remains too high given where the economy is heading.
- He said the inflation Americans feel every day goes well beyond oil and is widespread in the services sector, and that the Fed has tools to bring it down.
- Warsh estimated that inflation on the Fed's preferred measure was likely around 3.6% in August, with the official figure not due until later this month, and said too many categories are still rising by more than 3% on both a six-month and 12-month basis.
- Kashkari's focus on services also means core and services inflation data may carry as much weight as oil for rate expectations.
- --- Minneapolis Fed's Kashkari argues oil is only part of the inflation problem, and that with Hormuz beyond the Fed's reach, its job is to tackle the broad price pressure that remains.
- Government bonds across the developed world have been swept up in a historic sell-off, as oil prices surged to multi-month highs the week four of the world’s largest central banks decide whether to hike interest rates.
- The yield on America’s 10-year Treasury – the benchmark for global debt markets – jumped above five per cent for the first time since 2007 in a sign of continued investor unease over the long-term path of inflation.
- The strike came amid a dramatic re-escalation of tensions in the region, which has revived supply concerns in global energy markets.
- At $107 a barrel, Brent crude is now trading its highest level since May, while European natural gas prices are at highs not seen since the initial fallout from Russia’s Ukraine invasion.