ECB chief Lane: Return to 2% inflation target not yet assured

(Bloomberg) — The European Central Bank's battle to get inflation back to 2 percent is not yet won. Interest rates must remain as high as necessary to achieve that goal without unduly damaging the economy, said chief economist Philip Lane.

“A return to the target is not yet assured,” Lane said on Saturday. “In particular, monetary policy must remain in the restrictive range for as long as necessary to steer the disinflation process towards a timely return to the target.”

However, in a speech to a panel at the US Federal Reserve's annual conference in Jackson Hole, he warned that an overly restrictive monetary policy also posed risks – particularly for the eurozone economy, which, according to data, is losing momentum.

“The return to the target must be sustainable,” Lane said. “An interest rate path that is too high for too long would lead to chronically below-target inflation in the medium term and would be inefficient in terms of minimizing the side effects on output and employment.”

These comments come at a time when more policymakers are supporting market expectations that a second cut in borrowing costs will be made at the next ECB meeting in September, with some signalling that one or two more cuts are possible this year.

The ECB began cutting interest rates in June, citing increased confidence that inflation would return to target levels in the second half of 2025. Most ECB officials believe that recent data are consistent with this forecast and appear increasingly concerned about the deteriorating economic situation.

In his later speech to the panel, Lane struck a more optimistic tone.

“There is strong momentum in the European economy,” he said. “There should be a significant recovery.”

With the economy so far very strong but now potentially starting to weaken, Federal Reserve Chairman Jerome Powell said on Friday that it was time to start cutting US interest rates, confirming expectations that central banks will begin cutting borrowing costs next month.

“Good progress has been made in achieving the overarching objective of ensuring that inflation returns to target in a timely manner,” Lane said. “Crucially, this disinflation process has been underpinned by the powerful transmission of monetary policy to the financial system, demand levels and inflation expectations.”

(Updated with additional comments from Lane starting in the seventh paragraph.)

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