ECB’s Lane: Disinflation Dynamic Consistent with Reaching 2% Target in 2025

27 May 2024

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

In a speech at the Institute of International and European Affairs in Dublin, the text of which was posted on the website of the ECB, Lane said, ‘Even if inflation does not smoothly decline during the rest of 2024, further disinflation can be expected in the course of 2025.’

‘This disinflationary dynamic is consistent with both inflation stabilising at our target later in 2025 and a substantial economic recovery', he said.

Price stability was also dependent on economic growth, he said.

‘The sustainable attainment of the medium-term inflation target would be difficult in the absence of sufficient growth to foster the demand conditions that would be aligned with an overall inflation rate of 2%’, he said.

Barring surprises, which could take place between now and the June Governing Council meeting, there were already enough data available for the ECB to be able to ‘remove the top layer of restrictiveness’, he said, addressing a question from the audience.

The discussion about a possible interest rate cut in June was not a declaration of victory, he emphasised answering another question, as the ECB’s work was not yet completed.

Interest rate cut decisions after June would be made by balancing the risk of easing too quickly and the risk of keeping interest rates high for too long, he said. The latter would require a ‘corrective action through a subsequent acceleration in rate cuts that could even require having to descend to below-neutral levels to fix any persistent drift towards a below-target inflation trend’, he said.

‘Among other considerations, the subsequent pace of rate cuts will be slower if there are upward surprises to underlying inflation (especially in relation to the underlying dynamics of domestic inflation and services inflation) and the level of demand (in view of the implications of demand conditions for the medium-term inflation outlook) and will be faster if there are downward surprises to underlying inflation and the level of demand’, he said.

Both the ECB wage tracker, which was updated last Thursday, and the Indeed wage tracker were showing a moderation of wage pressures, he said.

‘At the same time, wage growth is expected to remain elevated in 2024, and to show a bumpy profile’, he said.

The decline in services inflation required a deceleration in wage growth, he noted, while the reduction of domestic inflation demanded a lower growth of labour costs and a compression of profits.