ECB’s Lane: Don’t See Economic Weakening that Would Warrant Accelerated Pace of Easing

13 January 2025

ECB’s Lane: Don’t See Economic Weakening that Would Warrant Accelerated Pace of Easing
Philip Lane, chief economist of the European Central Bank, at the 7th ECB Conference on Monetary Policy in Frankfurt on October 7, 2024. Photo by ECB.

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that ECB monetary policy should continue to ease but at a gradual pace, as services inflation still had to decline and the degree of economic deterioration that would warrant a faster pace was not expected.

In an interview with Austrian daily Der Standard, Lane said that the weakness of energy prices that had brought about lower headline inflation was ‘not going to continue’, and that for the ECB to achieve its target sustainably, ‘there would need to be a further decline in services inflation from around 4% today.’

In this context, rates had to go along a ‘middle path’, he said. ‘If interest rates fall too quickly, it will be difficult to bring services inflation under control. But we also don’t want rates to remain too high for too long, because that would weaken the inflation momentum in such a way that the disinflation process would not stop at 2% but inflation could materially fall below target.’

The direction was ‘clear’, he said, but the ECB needed to find ‘the middle path of being neither too aggressive nor too cautious in our actions.’

Lane declined to estimate where the terminal rate could be, as this would limit the ECB’s freedom to act, he said. Still, he struck an optimistic tone on inflation, predicting ‘significantly lower’ wage growth this year.

‘But we also need to make sure that the economy does not grow too slowly, because then we face a new problem, which is that inflation might stabilise below the target’, he said.

The suggestion that the ECB could be behind the curve met with rejection from Lane, who nonetheless assured that monetary authorities ‘don’t want to do any unnecessary damage to the economy’, also given the importance of growth for inflation.

The economic situation was not entirely negative, he said, citing labour market resilience and reiterating the expectation of a ‘moderate recovery’.

‘We do not see the kind of recessionary risk that would call for a dramatic acceleration in monetary easing’, he said.