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Eurozone inflation could fall below the European Central Bank’s 2 percent target if policymakers do not keep cutting interest rates, its chief economist Philip Lane warned.
IN interview with Austrian daily Der Standard reporting on Monday, Lane said that too little, not too much, inflation is now the risk rate-setters must consider.
Borrowing costs should not “remain too high for too long” because growth could be so weak that “inflation could fall significantly below target,” Lane said. He emphasized that, like high rates inflation“and that is undesirable”.
Lane’s comments highlight the widening transatlantic gap in monetary policy as the Federal Reserve has moved to a more hawkish tone after inflation in the US has risen and the strong growth in the number of jobs exceeded expectations.
Investors expect that it will ECB will continue to cut by a quarter of a point until borrowing costs reach around 2 percent, after policymakers cut the benchmark deposit rate in four steps from 4 to 3 percent from June.
Eurozone bond yields climbed to fresh multi-month highs on Monday after strong US jobs data on Friday, reflecting expectations of higher global borrowing costs. The benchmark German 10-year bond yield rose 3 basis points to 2.6 percent, the highest since July.
Olli Rehn, the governor of Finland’s central bank and a member of the ECB’s governing council, told Bloomberg TV that further rate cuts in the eurozone are necessary regardless of the Fed’s moves.
“[The ECB] is not the 13th federal district of the Federal Reserve System. We make decisions based on our mandate, which is price stability in the Eurozone,” he said in an interview in Hong Kong.
Lane said the ECB needs to work out a “middle way of being neither too aggressive nor too cautious” in 2025 as persistently high inflation in the services sector, which was still at 4 percent in December, continues to pose risks to price stability.
“If interest rates fall too quickly, it will be difficult to get service inflation under control,” Lane told Der Standard.
However, the chief economist warned more clearly than in previous public statements that weak growth is a threat to price stability.
“We also have to make sure that the economy does not grow too slowly because then we face a new problem, which is that inflation could stabilize below the target,” he said.
Asked about a recent Financial Times poll in which many economists said the ECB was too slow to cut interest rates, Lane said the central bank’s “primary focus” was on inflation, not growth. However, he added that “growth is the main driver of inflation dynamics”.
But he stressed that policymakers “do not see the kind of recessionary risk that would require a dramatic acceleration of monetary easing,” a hint that the larger half-percentage-point rate cuts some economists had hoped for were unlikely.
