PARIS (Reuters) -There is still some way to go before euro zone inflation is sustainably back at 2% but ECB policy should not remain restrictive for too long, otherwise price growth could fall below target, Philip Lane, the bank’s chief economist said in an interview.
Euro zone inflation has fallen rapidly in recent months, and policymaker are now debating when they could declare victory and whether the current pace of rate cuts is still appropriate.
“Monetary policy should not remain restrictive for too long,” French newspaper Les Echos quoted Lane as saying on Monday. “Otherwise, the economy will not grow sufficiently and inflation will, I believe, fall below the target.”
The ECB has cut rates three times already this year but investors now see a 50% chance it will cut by 50 basis points on Dec 12 instead of the usual 25 given weak growth and rising recession risks.
However, Lane also appeared to temper expectations, warning that inflation was not yet back to where the ECB wanted it because services price growth is too high and most of the recent fall was due to moderating energy costs.
The ECB thus needed to see some rebalancing in the composition of price growth with a decline in services inflation, so it could still reach its 2% target, even if energy, food and goods prices come under upward pressure.
“There is still some distance to go in terms of adjustment for inflation to return to the desired level in a more sustainable way,” Lane said.
November data due this week is expected to show euro zone inflation accelerating to 2.4% from 2.0%. It could then rise further at the end of the year before easing back to 2% by mid-2025, economists say.