ECB's Lane Warns Fiscal Policy Gets Tighter Next Year as Inflation Fight Grinds On

The European Central Bank is bracing for governments to pull back. Chief economist Philip Lane said Friday that fiscal policy is set to tighten further next year and beyond, and that conditions have already turned tighter, according to Breaking The News. He made the call at the ECB's annual Conference on Money Markets in Germany.

Lane didn't mince words on inflation. He said the bank needs to drag price growth back to its 2% target within a year or two. And he flagged a second-round risk: energy-driven inflation will bleed into wage negotiations and push prices up across the euro area economy.

He shared the stage with John Williams, president of the Federal Reserve Bank of New York. The pairing underscored how central banks on both sides of the Atlantic are wrestling with the same problem — energy shocks that won't sit still.

ECB President Christine Lagarde echoed the unease a day earlier. Speaking in Milan, she said it's getting harder to tell supply shocks from demand shocks, with energy prices spiking on one side and artificial intelligence on the other. Her bottom line: the ECB has to stop inflation from running away.

Across the Channel, the Bank of England already moved. It raised rates by 25 basis points to 4% — the first hike since August 2023 — with eight committee members in favor and one pushing for 50 basis points, which would have taken rates to 4.25%. Governor Andrew Bailey said that hike may not be the last unless the Middle East conflict is resolved.

Markets wobbled as the message sank in. Germany's benchmark index slid 1.91%, down 504.37 points, now at 25,862.16, and the Dow dropped 0.8%, off 413.21 points, now at 51,081.26. The S&P 500 and Nasdaq held small gains, while gold slipped 0.75%, now at $4,068.14 an ounce.