ECB’s Lane: Will Cut Interest Rates When Confident About Inflation Target

1 February 2024

By Isabel Teles – ROME (Econostream) – European Central Bank Executive Board member Philip Lane on Thursday said that the moment to discuss interest rate cuts would come when there was enough confidence about reaching the ECB's inflation target.

Speaking at Einaudi Institute for Economics and Finance in Rome, Lane said that it was unproductive to speculate as to when the Governing Council would discuss reducing interest rates, as the answer would be that decisions were data-dependent.

‘[L]ast week, we confirmed our medium-term inflation outlook. That medium-term inflation outlook says unless we get surprises, we should be converging back to 2%. And when the incoming data makes us sufficiently confident, that’s when we’ll start cutting’, he said.

Unit labour costs were fundamental for the 2024 inflation outcome, he said.

’What’s important for inflation is what’s happening to unit labour costs, because if the compensation per employee remains fairly elevated, there’s a big drop projected in unit labour costs this year’, he said.

Wages needed to grow in real terms to allow consumption growth and economic recovery, he said.

The conjecture was that wages would decelerate, he said, but added that ‘we have to be able to come back to 2% even with wages well ahead of a steady state.’

Firms played an important role in reducing inflation even with wages at a high level, he said.

‘Part of what we’re saying is firms would absorb these labour costs. And why would they do that? Because demand is restrictive and monetary policy is one of the reasons. How can they afford to do that? It's the level of profits’, he said.