FRANKFURT (Reuters) – European Central Bank chief economist Philip Lane said on Thursday there was still a “good case” for the economy to avoid a recession despite a tightening credit market.
Lending in the euro zone has come to a standstill as the ECB embarked to its longest and steepest ever series of interest rate hikes in a bid to bring down high inflation.
Lane said he remained confident the euro zone’s economy could avoid a credit crunch as companies were not bracing for a recession.
“We remain fairly optimistic that this is not that type of episode,” he told an event in Ireland. “And so the soft landing scenario, we think (there is) still a good case for it.”
Inflation in the euro zone is falling fast and the economy has begun contracting, data showed this week.
Combined with a collapse in credit creation, this meant the ECB had almost certainly finished raising its key rate, which is at a record high of 4%.
Commenting on market expectations for the ECB to cut that rate next year, Lane said 4% was “not a forever rate” and it was “not normal”.
Speaking earlier on Thursday, ECB policymaker Klaas Knot described the current level of rates as “a good ‘cruising altitude’ where they can remain for some time”.
Lane said signs that wage growth for new hires was slowing, as shown by the Indeed Wage Tracker, boded well for inflation to come back to the ECB’s 2% target by 2025.
But he warned about a new “energy shock” aggravated by war in the Middle East.
“A benign momentum dynamic (in energy inflation) reversed in the last few months,” Lane said. “We have a new energy shock, oil prices have gone up quite a bit, gas prices have gone up quite a bit and now that’s interacting with the war.”
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