Eurozone inflation still needs time to return sustainably to 2%, but ECB policy cannot remain too tight for too long as this could cause price growth to fall below target, Philip Lane, the bank’s chief economist, said in an interview.
Eurozone inflation has fallen rapidly in recent months, and policymakers are now debating when they can declare success and whether the current pace of interest rate cuts is still appropriate.
“Monetary policy should not remain too tight for too long,” Lane told a French newspaper on Monday. “Otherwise, the economy will not grow sufficiently and inflation, I believe, will fall below target.”
The ECB has cut interest rates three times this year, but investors now see a 50% chance that the bank will cut them by 50 basis points on Dec. 12, compared with its usual 25 basis point cut, due to weak growth and rising recession risks.
However, Lane also tried to temper expectations, warning that inflation is still not at the level the ECB wants because services price growth is too high and much of the recent decline has been due to falling energy costs.
The ECB needs to see some balance in the composition of price growth, with a decline in services inflation, so that it can hit its 2% target, even as energy, food and other goods prices come under upward pressure.
“There is still some way to go in the adjustment so that inflation can return to its desired level more sustainably,” Lane said.
November data due this week is expected to show eurozone inflation rising to 2.4% from 2.0%. Inflation could continue to rise towards the end of the year before returning to 2% by mid-2025, economists say.
