Philip Lane, the Chief Economist of the European Central Bank (ECB), has shared a sense of cautious optimism regarding slowing inflation. However, he emphasized the need for a substantial amount of additional data before he would feel confident in declaring victory over inflation.
The ECB has raised interest rates in each of its past nine meetings. It is currently deliberating whether to proceed with another rate hike on September 14, which could mark the last hike in the current tightening cycle. This decision hinges on the ECB’s efforts to achieve its 2 percent inflation target and the rapidly deteriorating growth outlook, making it a critical juncture for monetary policy.
Lane sees positive signs in inflation
In an interview with the Irish website, the Currency, Lane referred to 2023 as the year of “peak second round” as the repercussions of earlier interest rate increases ripple through the economy. He acknowledged that inflation remains high at 5.3 percent overall. Still, he pointed out some positive signs, highlighting a slight easing in goods and services inflation, which is viewed as a favorable development.
Lane did not explicitly state his preference regarding the upcoming interest rate decision, where policymakers will discuss the possibility of another rate increase or a pause. In a separate statement on Monday, ECB President Christine Lagarde also refrained from expressing a clear view.
Lane, who has tended to adopt a more dovish stance, did offer some optimism that managing consumer price growth might not be as daunting as previously thought. He emphasized that an underlying measure of inflation, which excludes volatile elements like energy, is showing signs of improvement.
He added that they anticipate this core inflation measure to decrease during the autumn. This conversation occurred shortly after the release of the eurozone consumer price report for August, which indicated that inflation remained above 5 percent on both headline and core measures, the last data point for the ECB to consider before making its decision.
Officials have expressed their desire to bring consumer price growth down to 2 percent in a “timely manner.” Lane provided some clarity and explained that it implies acting quickly enough so that everyone understands that the current inflation episode is temporary and time-limited. The goal is to discourage the idea that inflation will remain high in the longer term and to ensure that people comprehend this as a temporary inflationary period.
Lane also noted that there are still significant sources of uncertainty, particularly related to oil and gas prices. Additionally, the potential second-round effects of inflation caused by wage increases have yet to fully play out.
However, he did mention that concerns about strong European tourism driving robust services inflation have somewhat eased due to recent data. While service inflation remains notable, the fact that there has been some moderation in this area helps mitigate that concern.
ECB asked to communicate with accuracy in its forecasts
Meanwhile, Christine Lagarde, the President of the European Central Bank (ECB), has emphasized the need for the ECB to enhance its communication regarding its forecasts’ accuracy and acknowledge the limitations in its ability to predict future economic outcomes. She warns that failure to do so could further erode public trust in the institution.
Lagarde highlighted the difficulty faced by central banks in regaining confidence, especially after having to revise their forecasts for inflation and economic growth due to recent unexpected economic shocks like the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine.
In response to eurozone inflation reaching a record high of 10.6 percent last year, more than five times the ECB’s target, Christine Lagarde and her colleagues have shifted their focus more towards past inflation figures rather than relying heavily on forecasts when determining monetary policy. This shift underscores their commitment to addressing the immediate and tangible inflationary pressures experienced in the eurozone.
Source: https://www.cryptopolitan.com/ecb-chief-economist-remains-optimistic/