ECB’s Lane: Disinflation Consistent With 2% Target and Economic Recovery

15 April 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that the current disinflation process in the euro area was compatible with price stability and economic recovery.

In a speech at the University College Dublin, the text of which was posted on the website of the ECB, Lane said that the current phase of the disinflationary path was ‘necessarily bumpy’, but added, ‘This disinflationary dynamic is consistent with both inflation stabilising at our target in 2025 and a substantial economic recovery’.

Rising incomes and improvements in trade would support the recovery, ‘together with the prospect of dis-inflation unlocking future interest rate reductions, boosting domestic consumption and investment, while the normalisation of foreign demand will facilitate growth in exports’, he said.

There was an overall disinflation trend, but services inflation remained elevated, he said.

‘Over time, deceleration in wage growth is necessary in order for services inflation to converge to a rate that is consistent with meeting the 2% target for overall inflation’, he said.

Despite the gradual moderation, which was also shown in forward-looking trackers, wage pressures were still high, he said.

A deceleration in profits was another key factor for the inflation target to be reached, he said.

‘As embedded in the March projections exercise, further compression in profits is required to support the convergence of inflation to the target, and a sufficiently restrictive monetary policy stance is necessary to provide the dampened demand conditions to limit the pass-through of rising costs to consumer prices’, he said.

By the time of the June Governing Council meeting, updated staff projections and more data on wages and profits would be available, he said, noting that ECB would continue to follow a data-dependent and meeting-by-meeting approach without pre-committing to a particular rate path.

Based on the recent disinflation path, it was possible to conclude that the ECB’s current monetary policy stance was ‘making a substantial contribution to the ongoing disinflation process’, he said.