The European Central Bank (ECB), which recently reduced interest rates for the first time in five years, must maintain a stringent policy stance due to pervasive uncertainty and persistent inflation within the euro area, according to the bank’s chief economist, Philip Lane.
In a speech delivered in Dublin, Ireland, Lane articulated the need for a restrictive monetary approach: "Given the significant uncertainty and the sustained price pressures evident in domestic inflation, services inflation, and wage growth indicators, it is imperative that we uphold a restrictive monetary stance."
Last Thursday, the ECB lowered interest rates by 25 basis points, bringing the refinancing rate to 4.25%. This marked the first reduction since 2019 and was notable for occurring ahead of a similar move by the US Federal Reserve.
Lane emphasized that the ECB would continue to adopt a data-dependent and meeting-by-meeting strategy to determine the appropriate degree and duration of restrictive measures. He stressed that the central bank would not commit in advance to any specific interest rate trajectory, echoing remarks made by ECB President Christine Lagarde.
In a recent interview with European newspapers, Lagarde indicated that the ECB might delay further interest rate cuts for several meetings.
Lane further highlighted that wage growth in the Eurozone remains elevated, primarily as an adjustment response to past inflation surges. Using forward-looking wage trackers, he projected that while wage dynamics would stay high in 2024, they are expected to decelerate by 2025.
"This downward trend in wage growth supports the anticipated drop in inflation in 2025, as labor cost pressures are expected to ease next year," Lane remarked.
Conversely, Lane noted that the impact of rising labor costs on inflation is being mitigated by a reduced contribution from profits.
He concluded by stating that the tight monetary policy is limiting firms' ability to pass on cost increases to consumer prices, thus curbing demand and managing inflation expectations.
