ECB warns: Defence spending may raise inflation and interest rates

Philip R. Lane, chief economist of the ECB, warns that the increase in defence spending in the eurozone could generate inflationary pressures and delay interest rate cuts. This warning comes amid a debate on European rearmament.

The chief economist of the European Central Bank (ECB), Philip R. Lane, has highlighted the impact that increased defence spending may have on the eurozone economy. In a recent speech, Lane cautioned that this rise in public spending, although necessary due to the geopolitical context, could fuel inflation and affect the central bank's monetary policy.

Lane explained that defence spending, being largely domestic, generates greater demand in the economy, which can translate into upward pressure on prices. This situation could delay the convergence of inflation towards the ECB's 2% target, a scenario that the governing council would need to monitor closely.

The chief economist's warning comes at a time when EU countries, including Spain, are increasing their military budgets. The war in Ukraine and geopolitical tensions have spurred a rearmament race that, according to Lane, will have notable macroeconomic effects in the coming years.

For businesses and households, this scenario implies that interest rates could remain higher for longer, making credit and mortgages more expensive. The ECB, which has already begun a cycle of cuts, may be forced to pause or reverse these reductions if inflation does not ease at the expected pace.

Lane also noted that the impact of defence spending will depend on how it is financed: if it is funded through public debt, the effect on demand will be greater, whereas if it relies on tax increases, the impact could be more contained. In any case, fiscal and monetary policy must be coordinated to avoid imbalances.

The speech by the ECB's chief economist comes ahead of next month's monetary policy meeting, where the direction of interest rates in the eurozone will be decided. Markets are already pricing in possible moves, but Lane's statements add an element of uncertainty regarding the future path of rates.

For investors and savers, the recommendation is clear: monitor inflation trends and the ECB's decisions, as any upward surprise in prices could lead to a tightening of financial conditions. The next key event will be the governing council meeting, where these risks will be assessed.