MNI BRIEF: Early ECB Tightening Would Mean Double Shock - Lane

Euro area inflation will fade as price rises associated with short-term global bottlenecks in particular fade, new suppliers come online and demand normalises, ECB chief economist Philip Lane writes in a blog post published Thursday. Downward nominal rigidities in wages and prices mean that temporary inflation rate rises should be tolerated in order to avoid undercutting Europe's economic recovery from the pandemic.

Lane's comments appear to push back against recent hawkish central bank governor remarks and market expectations of two interest rate rises this year.

“Since monetary policy steers domestic demand, a tightening of monetary policy in reaction to an external supply shock would mean that the economy would be simultaneously confronted with two adverse shocks - a deterioration in the international terms of trade (generated by the increase in import prices) and a reduction in domestic demand,” he added.