The key economist at the European Central Bank (ECB) has issued a warning, indicating the bank’s aim of returning inflation rates to 2 per cent is not yet a guaranteed outcome. Philip Lane, during his address at the annual worldwide symposium of the Kansas City Federal Reserve, stated that maintaining higher interest rates is presently necessary.
While acknowledging some successful strides have been made in controlling inflation rates in Euro-regions, Lane remained reserved regarding how much relief the ECB can offer to borrowers going forward. “The recovery path to the target is not yet a certain one,” he said in his Saturday panel discussion. He proposed that monetary positions must continue to be restrictive until the disinflation process steers responsibly towards the set objective.
Notably, the move towards more relaxed policy was led by the ECB, which resulted in a reduction of a quarter-point in their central deposit rate, a first in nearly five years.
Two further reductions in interest rates are anticipated by markets this year, projected for September.
Lane shares his concerns as fellow bankers in both the US and the Bank of England deliberate the extent to which they should reduce interest rates, given the reduction in inflation and weakening labour markets.
The strongest indication yet of a reduction in rates in September came from Jay Powell, Fed Chair, who stated policy adjustments were now necessary. “The path is established and the speed and timing of rate cuts will depend on the incoming data’s evaluation and balance of risks,” he said.
Late on Friday, Andrew Bailey, Governor of the Bank of England (BoE), expressed cautious optimism about inflation, but stated it’s premature to claim success following a protracted period of rising prices. After a close-call vote to reduce interest rates in August, the BoE is predicted to maintain rates in September, but a further decrease is expected in November.
Now that inflation seems to be receding, it appears that the main concern of decision-makers is to protect their economies from excessive damage. Mr Lane emphasised the need for a “sustainable” return to the inflation target. He noted that if interest rates remained significantly high for a long period, this could result in below-target inflation in the longer term, which would be ineffective in reducing the impact on output and jobs. – Copyright The Financial Times Limited 2024.