ECB’s Lane: Cut Aimed at Preventing Persistent Undershooting, Stance Remains Data Dependent

9 July 2025

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s June rate cut was intended to prevent temporary inflation undershooting from becoming more lasting, ECB Executive Board member Philip Lane said Wednesday, adding that high uncertainty continued to call for a data-dependent, meeting-by-meeting approach.

‘Guarding against the risk of temporary deviations from target turning into longer-term deviations was an important factor in our June decision to cut rates by 25bp’, Lane said in a speech at the House of the Euro in Brussels.

‘By supporting the pricing pressure needed to generate target-consistent inflation in the medium term, this cut helps ensure that the projected negative inflation deviation over the next eighteen months remains temporary and does not convert into a longer-term deviation of inflation from the target’, he said.

The ECB now considered the effort to reverse the post-pandemic inflation wave mostly done, Lane said, and the policy focus has shifted to avoiding new shocks that could push inflation away from the 2% objective.

‘In a recent speech, I assessed that the challenge of returning inflation to the target after the 2021–2022 inflation surges can be considered to be largely complete’, he said. ‘The orientation now for the monetary policy stance is to make sure that the current shocks and prospective new shocks hitting the economy do not lead to medium-term deviations of inflation from our 2% target.’

He pointed to a ‘marked drop in energy prices’ and ‘a substantial appreciation of the euro’ as key developments reflected in the June staff projections. In addition, ‘the overall fiscal deficit [is] looking set to remain above 3% over the projection horizon.’

Lane stressed that monetary policy must be guided by incoming data, especially given heightened global uncertainty, including around trade and investment regimes.

‘Especially under current conditions of high uncertainty, it is essential to remain data dependent and take a meeting-by-meeting approach in making monetary policy decisions, with no pre-commitment to any particular future rate path’, he said.

That data dependence extends beyond inflation and activity, he added, to fiscal and geopolitical developments. ‘Shifts in international and domestic policy regimes are highly relevant for future inflation dynamics.’

Lane also outlined the ECB’s updated monetary policy strategy, which reinforces the symmetric 2% medium-term inflation target and elevates the role of risk analysis.

‘[O]ur assessment is that the symmetric 2% medium-term inflation target – which has served us well and remains unchanged – is best protected by appropriately forceful or persistent monetary policy action in response to large, sustained deviations of inflation from the target in either direction, to avoid deviations becoming entrenched through de-anchored inflation expectations’, he said.

He emphasized that monetary policy must be tailored to context. ‘The flexibility of the medium-term orientation recognises that the appropriate monetary policy response to a deviation of inflation from the target is context-specific and depends on the origin, magnitude and persistence of the deviation’, he said.

Scenario and sensitivity analyses will play a greater role, both internally and in external communication where appropriate, Lane said. ‘Some of this analysis has been published: this includes scenarios related to the pandemic, the unjustified Russian invasion of Ukraine, the conflicts in the Middle East and trade policy uncertainty.’

Lane reiterated that the ECB’s toolkit remains broader than just interest rates, particularly when the lower bound is in play or monetary policy transmission is at risk.

‘The list of “unconventional” instruments includes longer-term refinancing operations, asset purchases, negative interest rates and forward guidance”, he said.

The design and use of these instruments would ‘enable an agile response to new shocks and will appropriately reflect the intended aims, whether the calibration of the monetary policy stance or the protection of monetary policy transmission, subject to a comprehensive proportionality assessment’, he said.