ECB’s Lane: Closely Looking at Wage Deceleration to Decide on Rate Cuts

22 March 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Friday said that the ECB was closely monitoring whether the current wage deceleration was compatible with the 2% inflation target and justified a cut in interest rates.

Speaking at the Aix-Marseille School of Economics in France, Lane said, ‘…essentially what we’re trying to balance is, if we take our foot off the pedal by doing rate cuts, will that feed stronger price increases or is the wage deceleration further enough along that we will still hit the 2%? That’s essentially a big part of what we are looking at.’

There were signs of wage deceleration, but more evidence that the slowdown was strong enough was still necessary, he said.

‘Because, as in the forecast, we need to see it come down into the four [percent[s and then into the threes next year’, he said. ‘And what we are seeing now in February is that it is starting to come into the fours, so that is in line with the forecast, but we need to see more of this in the weeks ahead’, he said.

The Governing Council was still worried about high inflation in labour-intensive sectors, he said.

‘Goods inflation has come down quickly, so that is not a headache’, he said. 'Services inflation is above the historical distribution, and this is why we have concerns.’

It was also important to see a fall in profits, he said, noting that they had been ‘very high’ in the beginning of 2023 and were now starting to decrease.

‘The functional role of monetary policy is to create a price environment which supports disinflation even when the costs are going up’, he said.

Monetary policy action had been effectively dampening demand and there was now a strong expectation of easing, he said.

‘The market expects us at some point soon to start easing, because if we left the rates where they are now, we would go beyond, we would go back to a kind of disinflation’, he said. ‘Again, to repeat, if we left rates where they are, this would continue, and it would be beyond what we needed to bring inflation back to 2%.’