ECB’s Lane: Need More Than Another Month to Assess Momentum in Services Inflation

17 June 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that some of the questions that the ECB had about the disinflation process were still open and that the answers wouldn’t be available by the next Governing Council meeting in July.

Speaking at a Reuters Newsmaker event in London, Lane said that in December the Governing Council had decided to build its confidence in the disinflation process by waiting to see if the forecasts were confirmed in the next projections rounds, and that after the June meeting ‘some of the questions we have were not resolved immediately, like the momentum in services inflation.’

‘So, I think we do need to wait on that, but again with the qualifier that lots of things in the world could happen, which could turn out to dominate’, he elaborated. ‘But conditional to wanting to know more about services inflation, we do need more than a month of data to do that.’

Even without new projections or sufficient data on services inflation, the July meeting would benefit from June raw inflation data, granular May inflation data, the Bank Lending Survey, the corporate telephone survey and the Survey on the Access to Finance of Enterprises (SAFE) survey, he said.

There had been a turning point for inflation last autumn in addition to consistent forecasts showing inflation reaching the target in 2025, he said, but the ECB wanted to be sure that it was a ‘solid improvement.’

‘Basically, this improvement is welcomed, but we really need to see it reconfirmed, for example, we really need to see the wage data be consistent with this. And the conclusion in June was we do have that’, he said.

Asked whether the ECB had committed to soon to an interest rate cut in June, he said that the data available provided enough confidence for the decision, adding, ‘I think central banks have to be willing to surprise the market if they need to.’

For inflation to go from the current 2.6% to the 2% target, a slowdown in wages, the reversal of fiscal effects and economic recovery were necessary, he said, adding that the ECB had a ‘fair amount of confidence’ about the inflation destination in the second half of 2025.

Compared to the hiking cycle, any descending rate path would be slow, he said.

‘Our baseline, our forecast, has us back to target in the second half of next year. If inflation is not coming back as quickly as we would like or if the economy is stronger than we expect, then we’ll go more slowly’, he said. ‘Conversely, if we get welcome surprises on inflation or the economy weakens more than we expect, we will move more quickly.’

The peak effect of high interest rates on GDP was probably past, as the European economy was starting to grow again, but the peak effect on inflation was yet to come, he said.

‘There’s a lot of backward-lookingness in European wage data, so by having inflation roughly low this year, that lowers the wage increase next year and turns out to lower 2025 inflation rates’, he said. ‘So, I would say for inflation, we haven’t reached the peak impact.’