ECB chief Lane: Inflation target of two percent remains uncertain

The battle to bring inflation back to the ECB's target of two percent is far from over and interest rates must be at least as high as necessary to achieve that goal without unduly damaging the economy, said European Central Bank chief economist Philip Lane.

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

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

“The return to 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 as more and more policymakers are joining the chorus of market participants who expect a second cut in borrowing costs at the next ECB meeting in September, with some suggesting 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 in the second half of 2025. Most ECB officials believe that recent data are consistent with this forecast, although one can clearly sense that they are more concerned about the deteriorating economic environment.

In his later panel discussion, Lane expressed more confidence.

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

“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.”