FRANKFURT (Reuters) -The European Central Bank can ease policy further this year but must find a middle ground that neither induces a recession nor causes an undue delay in curbing inflation, ECB chief economist Philip Lane told an Austrian newspaper.
The ECB cut interest rates four times last year and markets see another four steps this year, with most of them coming in the first half of the year as inflation was seen heading to the bank’s 2% target by around mid-2025.
“If interest rates fall too quickly, it will be difficult to bring services inflation under control,” Der Standard quoted Lane as saying on Monday.
“But we also don’t want rates to remain too high for too long, because that would weaken the inflation momentum in such a way that the disinflation process would not stop at 2% but inflation could materially fall below target,” Lane added.
A key condition in getting price growth under control would be to see a drop in services inflation, which has been stuck at around 4% for most of 2024, Lane said.
But wage growth, one of the biggest factors in price pressures, will be “significantly” lower this year, ensuring a further decline in inflation, which stood at 2.4% in December.
While economic growth has been hovering just above zero for most of the past year, Lane said he did not see the kind of recessionary risk that would call for a dramatic acceleration in monetary easing.
A recession was also not necessary to get inflation under control given that the conditions in taming price growth were mostly there already.
“What we will have to work out this year is the middle path of being neither too aggressive nor too cautious in our actions,” Lane added.