ECB’s Lane: Disinflation ‘Well on Track’, Monetary Policy Should ‘Maintain Agility’

18 December 2024

ECB’s Lane: Disinflation ‘Well on Track’, Monetary Policy Should ‘Maintain Agility’
Philip Lane, chief economist of the European Central Bank, at the ECB Conference on Monetary Policy 2024 in Frankfurt on October 7, 2024. Photo by the ECB under CC BY-NC-ND 2.0.

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Wednesday said that euro area disinflation was proceeding on track and that domestic price pressures would lessen, so that the ECB should 'maintain agility' with respect to monetary policy.

Speaking at an MNI webcast, Lane, according to a text provided by the ECB, said, ‘[T]he incoming information and the latest staff projections indicate that the disinflation process remains well on track.’

‘While domestic inflation is still high, it should come down as services inflation dynamics moderate and labour cost pressures ease’, he said.

Financing conditions ‘along the entire transmission chain’ were still restrictive, he said.

‘Looking to the future, in the current environment of elevated uncertainty, it is prudent to maintain agility on a meeting-by-meeting basis and not pre-commit to any particular rate path’, he continued.

If there were upside surprises relating to inflation or the economy, rate cuts could be slower than the path incorporated in the latest macroeconomic projections, he said. Should there be downside shocks, the process of easing could accelerate, he said.

‘All else equal, the rate path will also be influenced by our ongoing assessment of underlying inflation dynamics and the strength of monetary policy transmission’, he said.

Risks to growth were on the downside, while inflation could be higher than expected depending on wage and profit developments as well as geopolitical factors and the climate crisis, he said. However, inflation was also subject to downside risks, if consumption and investment failed to recover, if monetary policy had a stronger effect on demand than anticipated or if the global economy deteriorated, he said.

Data suggested less dynamic domestic inflation, he said, pointing to the large difference between services inflation and its underlying mid-term trend. Wage data ‘broadly confirm our previous assessment of elevated but easing wage pressures’, he said, citing the recent slowdown of compensation per employee and unit labour costs.

‘Profit margins continue to buffer the impact of elevated labour costs on inflation: annual growth in unit profits remained negative in the third quarter’, he said. ‘Forward-looking wage trackers continue to point to a material easing of wage growth in 2025.’

Meanwhile, the rate cuts already implemented and the expectation of more cuts were gradually lowering borrowing costs, but financing conditions were still restrictive, he said. In this context, he pointed to the high cost of new credit for companies, tight credit standards and the slow progress of bank lending to firms.

Lane reiterated the ECB’s attachment to a data-dependent, meeting-by-meeting approach to policymaking; the three criteria of the ECB’s reaction function; and the unwillingness to pre-commit.

According to Lane, the latest data pointed to slower near-term economic growth, but the conditions were in place for recovery over the forecast period. Stronger foreign demand would support exports, he said.

‘At the same time, trade uncertainty has increased materially and the effects of a potential increase in tariffs on the euro area economy will depend on the extent, timing and magnitude of tariff and non-tariff measures, as well as on the responses of the EU and other countries’, he observed.

Although job markets in the region were resilient, demand for labour was weakening and there would be fewer jobs created in the current quarter, he said.