ECB’s Lane: Can Start Cutting in June, But ‘Need to Be Restrictive All Year Long’

27 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that the ECB had enough information to support a first interest rate cut in June, but argued for a restrictive stance until the end of the year.

In an interview with the FT, Lane was asked about the likelihood of an interest rate cut in June, to which he answered, ‘[I]t is probably fair to say that, barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction, being at 4%.’

Even with some room for easing, the bumpiness of inflation demanded that the ECB remain in restrictive territory, he said.

‘The best way to frame the debate this year is that we still need to be restrictive all year long. But within the zone of restrictiveness, we can move down somewhat. We don’t need the data to say normalisation is a lock’, he said. ‘What we do need the data to say is: is it proportional, is it safe, within the restrictive zone to move down.’

The speed at which the ECB would decide on further interest rate cuts would depend on incoming data, he said.

The 2% inflation target had not been achieved yet, he reminded, and the current phase was a transitional one.

‘But in terms of that first step, in saying that maybe it is time to come away from that peak, that is a sign that monetary policy has been delivering in making sure that inflation comes down in a timely manner.’

Wage data released last week, which showed a slight increase in wage growth in the euro area in Q124, had been anticipated by the ECB, he said.

‘Looking at the full detail, the overall direction of wages still points to deceleration, which is essential. Deceleration does not necessarily mean an immediate return to steady state’, he said. ‘This year the adjustment is clearly quite gradual.’

April services inflation started to come down, he noted, but still called for a restrictive approach.

‘The scale of the inflation we still have in services and domestic inflation clearly means we need to be restrictive this year, because we need to make sure that the still significant amount of cost pressure does not fuel price increases too much’, he said.

Asked about his view on the theory that the last mile of the disinflation was the hardest, he said that this was behind his defence of keeping restrictions for longer.

‘We need to see more progress before we move from maintaining the restrictive phase to thinking about normalisation’, he said.