ECB policy tightening could be counterproductive, says bank’s chief economist

FRANKFURT (Reuters) – Tightening monetary policy to temper the current bout of inflation in the euro zone would be counterproductive, European Central Bank chief economist Philip Lane said on Monday, largely repeating the bank’s recent policy stance.

With the annual inflation rate exceeding 4% last month, more than twice the ECB’s 2% target, pressure has grown on the bank to abandon its ultra-easy monetary policy stance, and markets have now priced a rate hike next year.

But Lane argued that inflation is driven by temporary factors and ECB policy is ineffective in tackling rapid price growth now, especially as it is likely to fade on its own.

“An abrupt tightening of monetary policy today would not lower the currently high inflation rates but would serve to slow down the economy and reduce employment over the next couple of years and thereby reduce medium-term inflation pressure,” he said in a speech.

“Given our assessment that the medium-term inflation trajectory remains below our 2% target, it would be counter-productive to tighten monetary policy at the current juncture,” he added.

ECB President Christine Lagarde and a host of Governing Council members all pushed back at market expectations last week, arguing that conditions for a rate hike as specified by the bank’s guidance were “unlikely” to be met next year.

Lane said that watching wages will be crucial in judging the durability of inflation but even a big rise in the coming months may not necessarily mean a trend shift as that could also be a transitory force.

“A one-off shift in the level of wages as part of the adjustment to a transitory unexpected increase in the price level does not imply a trend shift in the path of underlying inflation,” he said.

(Reporting by Balazs Koranyi; Editing by Hugh Lawson)