Philip Lane, the Chief Economist at the European Central Bank (ECB), has stated that possible interest rate cuts next month should not be seen as a successful strategy against inflation. He revealed his concerns about high service fees, despite the decrease in growth of energy, food, and goods prices.
Speaking to the Institute of International and European Affairs (IIEA) on Monday, Lane declined to commit to a specific pace at which rate cuts would be implemented. He advised that the ECB should refrain from advance commitments, sticking to the position implemented over a year ago that subsequent decisions should be reliant on the data and evaluated on a meeting by meeting basis.
Various members of the ECB’s governing council – Lane included – have hinted recently that it would be fitting to lower interest rates come June 6th, providing there isn’t any shocking inflation data. The ECB previously raised its key deposit rate from negative 0.5% to 4% in the 15-month period leading up to last September.
According to Eurostat, the EU statistics body, headline inflation dipped to 2.4% last month from a peak of 10.6% in the final quarter of 2022. The ECB’s objectives peg inflation at roughly around 2%. However, inflation for a range of services, inclusive of hospitality, trips, business transactions, and transport, was approximately 4% in April.
Lane, an economist from Ireland, emphasised that potential interest rate reductions are not confirmation that the battle against inflation has been won. He observed that the European economy is still subjected to cost pressures. While certain restrictions can be relaxed, he does not anticipate a return to normality this year.
When questioned whether the ECB was late in raising rates in 2022, lagging behind other big central banks like the US Federal Reserve and the Bank of England, Lane contested that the ECB definitely would have acted sooner had they known how inflation would develop that year. He acknowledged that a significant amount of price pressures stemmed from the conflict in Ukraine.
Lane articulated that, while the ECB is currently researching this issue, the final conclusion relies on successfully bringing inflation back down to target levels. The bank expects this will occur by next year.
Former governor of the Central Bank of Ireland, Mr Lane, has expressed confidence stemming from the resurgence of wage growth within the euro zone over the past year. This rebound follows significant pay settlements reached between companies and unions last year. Central banking authorities around the world have continually raised concerns in the recent past regarding the economic impact of the wage-price spiral seen in the 1970s.
“In order to achieve a rate of inflation in services that aligns with the overall inflation target of 2 per cent, wage growth needs to undergo a slowdown over time,” according to Mr Lane. At the onset of this year, it was anticipated by financial markets that the European Central Bank would drop official rates by 1.5 percentage points throughout this year. Current predictions project under 0.75 points worth of reductions.
To counterbalance inflation, the central banks of countries including Switzerland, Sweden, Czech Republic, and Hungary have already lowered borrowing costs this year. However, it is not anticipated that the Federal Reserve and the Bank of England will make similar rate cuts before the summer.