ECB’s Lane Says Restrictive Monetary Stance Must Be Maintained

The European Central Bank, which last week cut interest rates for the first time in five years, will have to maintain a tight policy stance given the high uncertainty and sticky inflation in the euro area, the bank’s chief economist Philip Lane said Tuesday.

“It should be clear that the high level of uncertainty and the still-elevated price pressures that are evident in the indicators for domestic inflation, services inflation and wage growth mean that we will need to maintain a restrictive monetary stance,” Lane said in a speech in Dublin, Ireland.

The ECB lowered interest rates by 25 basis points last Thursday, taking the refi rate to 4.25 percent. That was the first reduction since 2019 and a rare occasion when the euro area central bank cut rates ahead of the US Federal Reserve.

The ECB will continue its data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction, Lane said.

The central bank will not pre-commit to a particular rate path, Lane said, echoing words of ECB President Christine Lagarde.

The ECB may wait several meetings before another interest rate cut, Lagarde said in an interview to some European newspapers yesterday.

Wage growth is still elevated in Eurozone and primarily driven by the ongoing adjustment to the past inflation surge, Lane said. Citing the forward-looking wage trackers, the policymaker said wage dynamics will remain elevated in 2024 but will decelerate in 2025.

“This negatively-sloped profile for wage growth helps to underpin the projected decline in inflation in 2025, with less pressure from labour costs next year,” Lane said.

On the other hand, the net impact of labor cost increases on inflation is being buffered by a lower contribution from profits, the rate-setter observed.

The tight monetary stance is constraining the ability of firms to pass through cost increases to consumer prices by dampening demand and containing inflation expectations, Lane said.

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