The recent rise in energy prices may cool demand in the eurozone through a variety of channels that would limit the need for rate rises to contain inflation, European Central Bank Chief Economist Philip Lane said Monday.

The ECB last month raised its key interest rate for the second time since the start of the war between the U.S. and Iran in late February. Investors expect to see further increases in borrowing costs following data released last week that showed eurozone inflation reached a three-year high in September.

However, in a speech, Lane outlined a variety of ways in which the "second wave" of the energy supply shock could slow the eurozone economy, highlighting the jump in yields on long-term government bonds as a "material tightening" of financial conditions.

"All else being equal, these 'demand destruction' channels can limit the required adjustment in the monetary stance to ensure the timely return of inflation to the target," he said.

Lane echoed recent comments from ECB President Christine Lagarde to the effect that the policy response to higher energy prices should be "measured."

"We remain in the 'middle path' for monetary policy," he said.

Yields on eurozone government bonds have risen over recent weeks. With no end to the conflict in the Middle East in sight, investors have grown to expect that inflation will stay high for longer than they had previously anticipated. But there are also concerns about the rapid increase in government debts, particularly in France.

Lane said the rise in yields would cool economic growth in the currency area.

"An increase in long-term interest rates has a material adverse impact on activity levels and lowers inflation over the medium term," he said.

But there are other ways in which higher energy prices can slow the economy and contain inflation, he said. Higher prices lower activity in sectors that use a lot of energy, and mean that consumers are spending more on imports than goods and services produced in the currency area.

The uncertainty created by the war can also prompt households to save more and spend less.

"The ongoing assessment of how the energy supply shock is shaping the overall inflation outlook needs to take into account not only the direct impact but also the indirect impact via these channels," he said.

An expected reduction in eurozone government borrowing next year could also slow the economy, Lane said.

"While growth has been holding up this year, the fiscal impulse is projected to turn from positive in 2026 to negative in 2027 and 2028," he said.

The eurozone economy has grown more rapidly than expected since the war began, outpacing the U.S. in the three months through June, while surveys point to a continued expansion in the third quarter.

However, Lane said the economy will not necessarily perform as well in response to the recent jump in energy prices.

"It is essential to assess whether the second wave will operate more powerfully on both activity levels and inflation dynamics than the first wave," he said.

Lane's speech, together with other comments from officials, suggests the ECB wants to limit investor expectations of future rate rises. In particular, Lane cautioned against linking those expectations too directly to moves in energy prices.

"The appropriate monetary policy should not be interpreted as solely driven by the energy supply shock but rather requires a multi-pronged diagnostic assessment," he said.