ECB’s Lane: Inflation Still Too High, but Will Return to 2% in 2H2025

30 July 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Tuesday said that euro area inflation would remain elevated for some time but then converge to the target in the second half of 2025.

In an interview with YouTube channel Money & Macro conducted on 23 July, Lane said, ‘In our meeting last week we reaffirmed our projection for the future, which is essentially inflation is now in around 2.5%, that we will be back to 2% in the second half of next year. So, there's another year where inflation is a little bit too high, but that's the ongoing second stage.’

The second stage of disinflation was ‘inescapable’, he said, but it was important to ensure that it would not last for too long and that the catch-up in wages and prices would be moderate.

‘[W]hether it's employers or unions or individual workers, the context of how this process should work has to be anchored in the understanding that overtime wages need to catch up’, he said. ‘But equally it cannot be a situation where we get into a cycle where the wage increase is too high and prices have to be reset too high – that that's the famous wage price spiral.’

There were no signs of a wage-price spiral in the euro area because inflation expectations were well anchored, he said.

Without directly touching upon current prospects for monetary policy, Lane said that if the ECB managed to fulfil its mandate of restoring price stability in a timely manner – which he believed to be the case –, then economic activity would pick up.

‘[O]ver time we can walk back from the high level of interest rates and, in turn, as we walk back from the high level of interest rates, that will allow these sectors to resume. It will allow construction to resume and green investment to resume’, he said.

In a geopolitically fragmented world, it was a consensus that inflation was more volatile, he said, and monetary policy makers had to react to eventual shocks.

‘Central banks, we do try to anticipate where we can’, he said. ‘And so you might see the ideal is a world where if you don't have shocks, inflation is around 2[%], but the interest rate needed to deliver that 2% could move around.’