DUBLIN: More progress towards the European Central Bank’s (ECB) 2% inflation target could provide grounds to lower interest rates further following last week’s initial cut, says chief economist Philip Lane.
“Conditional on making progress in moving towards our targets, I think more cuts will happen,” Lane told an event in Dublin.
“If we see progress, then we will continue to bring down the level of restrictiveness and eventually normalise rates. If we don’t see progress, then we will go more slowly.”
While acknowledging a “faster-than-expected” slowdown so far in consumer prices, Lane said officials must “ensure that full disinflation is secured with inflation returning to our 2% target in a timely manner”.
The ECB delivered the rate reduction it had long signalled last week, while simultaneously lifting its inflation projections for 2024 and 2025 – sparking debate about whether the reduction was justified and where monetary policy will go next.
Most officials have since said the decrease in the deposit rate to 3.75% from a record 4% was appropriate, but they urged caution on subsequent action.
President Christine Lagarde has underscored that the fight against inflation isn’t over, while Ireland’s Gabriel Makhlouf went as far as to suggest that the ECB may not loosen further at all.
In contrast, France’s Francois Villeroy de Galhau said that policymakers have “significant leeway” to lower rates before exiting restrictive territory.
“As regards to our next rate cuts, I plead for a ‘pragmatic gradualism’, both on the timing, without haste nor procrastination,” he said on Tuesday in a speech in Paris.
In prepared remarks, Lane warned that wage growth “is still elevated, primarily driven by the ongoing adjustment to the past inflation surge”.
While it should decelerate in 2025, monetary policy needs to stay as tight for a while, he said.
“We will keep policy rates sufficiently restrictive for as long as necessary,” Lane added.
“We are not pre-committing to a particular rate path and will continue to take a meeting-by-meeting approach to determining the appropriate level and duration of restriction.” — Bloomberg
