Eurozone Can Achieve Simultaneous Growth and Disinflation, ECB's Lane Says

19 April 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The European Central Bank is projecting both significant growth and substantial disinflation because the projected paths for output, consumption and investment remain well below the pre-pandemic trends, ECB Chief Economist Philip Lane said on Wednesday.

In a speech in Dublin, Lane reiterated that if the ECB's central scenario continues to be valid, the central bank will tighten monetary policy more.

He said it was ‘possible to combine significant growth in the coming years with projections of substantial disinflation’, because ‘the projected paths for output, consumption and investment remain well below the pre-pandemic trends.’ Developments meant that ‘the supply capacity of the economy is set to recover from the pandemic-related damage and the war-amplified energy shock, with the tightening in monetary policy ensuring that demand is better aligned with supply.’

Regarding the monetary policy outlook, he repeated that if ‘the baseline scenario underlying the March ECB’s staff macroeconomic projections persists, it will be appropriate to raise rates further.’

On potential second-round effects, he said that ‘the dampening of demand through the tightening of monetary policy means that price setters and wage-setters are on notice that excessive price and wage increases will not be sustainable.’

Recent developments in the euro area economy mask ‘a continued divergence at the sectoral level’, he said. ‘In particular, the expansion of services business activity is accelerating, supported by a continuation of strong reopening effects and rising incomes, whereas manufacturing output stagnated in the first quarter of the year’, he noted.

The steady improvement in business and consumer sentiment over the past few months in the Eurozone ‘may have stalled’, he said.