Bank’s chief economist strikes note of caution as eurozone unemployment rises and consumer sentiment dips
“The return to target is not yet secure,” Mr Lane said on Saturday. “In particular, the monetary stance will have to remain in restrictive territory for as long as is needed to shepherd the disinflation process towards a timely return to the target.”
In remarks for a panel at the US Federal Reserve’s annual conference in the resort town of Jackson Hole, however, he warned that overly tight policy also poses dangers – especially to a eurozone economy that data suggests is losing momentum.
“The return to target needs to be sustainable,” Mr Lane said. “A rate path that is too high for too long would deliver chronically below-target inflation over the medium term and would be inefficient in terms of minimising the side-effects on output and employment.”
The comments come as more and more policymakers endorse market expectations for a second reduction in borrowing costs at the ECB’s next meeting, in September. Some are also signalling that another one or two cuts are possible this year beyond that.
The ECB started lowering rates in June, citing increased confidence that inflation would fall back to target in the second half of 2025.
Most officials see recent data as in line with that projection and appear to have become more worried about the deteriorating economic backdrop.
Speaking later on the panel, Mr Lane struck a more upbeat tone.
“There’s a lot of momentum in the European economy,” he said. “There should be a lot of recovery.”
Faced with a US economy that’s been very strong but may now be starting to weaken, Federal Reserve chairman Jerome Powell said at the same conference on Friday that the time has come to begin lowering US rates, affirming expectations that officials will begin trimming borrowing costs next month.
“There has been good progress in delivering the overriding goal of making sure that inflation returns to target in a timely manner,” Mr Lane said.
Nine members of the ECB’s rate-setting governing council attended the Federal Reserve’s annual get-together in Jackson Hole, with several already making the case to further loosen monetary policy on September 12.
Such arguments are made easier by an inflation rate that economists surveyed by Bloomberg reckon will slump to 2.2pc this month, having wrong-footed them in July by edging up to 2.6pc. That rosy outlook even includes a long-awaited dip in underlying price pressures, which have been lodged at 2.9pc for three months.
Money markets are now betting on two more quarter-point rate cuts this year, starting next month, with a 60pc chance of a third. That would lower the deposit rate to 3pc.
Eurozone unemployment has ticked up, while consumer sentiment has unexpectedly dipped. For Mario Centeno, the head of Portugal’s central bank, the labour market is a key concern.
“The gamble is, will employment hold in the context of a stagnant economy or not?” he said. “There has been quite a bit of a sacrifice in Europe to bring inflation down. Even in this soft-landing story, we don’t grow.”
