ECB's chief economist warns inflation battle has not been won

The bank's meeting on September 12 and the Fed's two-day meeting from September 15 are being viewed as a key test as to whether inflation has been truly brought under control

Sun, 25 Aug, 2024 - 15:55

Alan Healy

The battle to tame surging inflation across Europe has not yet been won, the chief economist of the European Central Bank (ECB) Philip Lane has warned.

His warning comes ahead of the publication this week of key new price data that will feed into decisions on interest rates.

Speaking on a panel at the US Federal Reserve’s annual conference in Jackson Hole, Wyoming, USA, Mr Lane said the return to 2% target is not yet secure.

“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," he said.

Mr Lane, a former governor of the Central Bank of Ireland, said the return to target needs to be sustainable.

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 minimizing the side effects on output and employment

His comments on a restrictive stance towards rates stood in contrast to remarks by the US Fed chair, Jerome Powell, who said the time has come for the central bank to cut its key policy rate — affirming expectations that officials will begin lowering borrowing costs next month and making clear his intention to prevent further cooling in the labour market.

“The time has come for policy to adjust,” Mr Powell said Friday in the text of a speech at the Kansas City’s Fed’s annual conference.

Federal Reserve Board chair Jerome Powell said that the time has come for policy to adjust. File Picture: Susan Walsh/AP

“The direction of travel is clear and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

The Fed chief also acknowledged recent progress on inflation, which has resumed moderating in recent months after stalling earlier in the year: “My confidence has grown that inflation is on a sustainable path back to 2%,” he said, referring to the central bank’s inflation target.

The European Central Bank's meeting on September 12 and the Fed's two-day meeting from September 15 are being viewed as a key test as to whether inflation, which has dominated the global economy for the past two years, has been truly brought under control.

A fresh round of inflation data this week will feed into this decision-making process

On Thursday, Ireland's CSO will publish the flash estimate or the Harmonised Index of Consumer Prices (HICP) for August. The figure for July and June stood at 1.5%, its lowest level since June and July of 2022 when the inflation rate peaked at 9.6%.

On Friday, European statistics body Eurostat will publish inflation data for the eurozone. The inflation rate in July stood at 2.6%, a slight increase on the 2.5% reading in June. Friday also sees the release in the US of the personal consumption expenditures price index, the US Fed’s preferred measure of underlying inflation.

The European Central Bank already cut rates by 25 basis points in June, beginning the process to reverse the string of hikes introduced the counteract surging inflation. A decision was made to hold rates steady in July, which means the September meeting is being viewed as a key gauge in the inflation fight.

Speaking in the US, Mr Lane said there is a lot of momentum in the European economy. "There should be a lot of recovery," he said.

“There has been good progress in delivering the overriding goal of making sure that inflation returns to target in a timely manner.

"Crucially, this disinflation process has been underpinned by the forceful transmission of monetary policy to the financial system, the level of demand and inflation expectations.”