ECB’s Philip Lane warns of 'bumpy' inflation decline but hints at rate cut in June

Central Bank governor Gabriel Makhlouf said policymakers must work together to mitigate risks that may arise from the 'rapidly' growing non-bank sector

Philip Lane said: 'We will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction.'

European Central Bank (ECB) chief economist Philip Lane said the retreat in consumer-price growth is unlikely to be smooth.

While Mr Lane expressed confidence that inflation is heading back to the 2% target in 2025, he said gains in wage and service costs remain elevated. He re-iterated the ECB’s latest policy statement that hints at a cut in interest rates when officials meet in June.

“The current phase of disinflation is necessarily bumpy,” Mr Lane said in a speech.

“Headline inflation is expected to fluctuate around current levels in the near term on account of base effects in the energy component and the reversal of the upward effect of the early timing of Easter on services inflation in March,” he said.

The ECB last week firmed up plans to lower borrowing costs in June, having left its deposit rate at a record-high 4% for a fifth meeting.

"We will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction,” Mr Lane said. “Wage pressures are gradually moderating but remain elevated compared to a steady-state benchmark.”

Meanwhile, Central Bank governor Gabriel Makhlouf suggested policymakers must work together to mitigate risks that may arise from the “rapidly” growing non-bank sector in an environment of high interest rates and inflation, which continue to put pressure on consumers.

“Ireland has one of the largest funds industries in the world with around €4.5tn in assets under management,” he said.

Lessons

Mr Makhlouf said that some non-banks have the potential “to amplify adverse shocks” and that bankers “cannot forget the lessons of the global financial crisis”.

“In recent years, Ireland has played an active role in international efforts to develop solutions to address financial stability risks in the funds sector. We have introduced leverage limits for property funds connected to our domestic economy," said Mr Makhlouf. 

He added that the existing regulatory framework was not designed to cater for so-called non-banks and said an updated framework should be discussed.

“The spring meetings offer an excellent opportunity to build and strengthen bilateral relationships, especially with countries that are outside of the Eurosystem but also with senior leaders,” said Mr Makhlouf.

Mr Makhlouf made his comments ahead of a week of engagements with the International Monetary Fund (IMF) and the World Bank Group in Washington DC.

- Additional reporting by Bloomberg