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Inflation in the euro zone could fall below the European Central Bank's two percent target if policymakers do not continue to cut interest rates, warned its chief economist Philip Lane.
IN interview with Austria's Der Standard newspaper published on Monday, Lane said that too little rather than too much inflation is now a risk ratemakers need to take into account.
Borrowing costs should not “remain too high for too long” because growth could be so weak that “inflation could fall substantially below target”, Lane said. He emphasized that as well as high rates inflation“that is also undesirable”.
Lane's comments highlight a growing transatlantic gap in monetary policy as the Federal Reserve switched to a more hawkish tone after US inflation accelerated and strong job growth beat expectations.
Investors expect that ECB will continue to cut by a quarter of a percentage point until borrowing costs reach about 2 percent after policymakers cut the key deposit rate in four steps from 4 to 3 percent since June.
Eurozone bond yields climbed to fresh multi-month highs on Monday after Friday's strong US jobs data, reflecting expectations of higher global borrowing costs. The yield on Germany's benchmark 10-year bond rose 3 basis points to 2.6 percent, the most since July.
Olli Rehn, the governor of Finland's central bank and a member of the ECB's Governing Council, told Bloomberg TV that further rate cuts in the eurozone are necessary regardless of the Fed's actions.
“[The ECB] is not the 13th Federal Reserve District. We are taking decisions based on our mandate, which is price stability in the eurozone,” he said in an interview in Hong Kong.
Lane said the ECB needed to work out a “middle way of being neither too aggressive nor too cautious” in 2025 as persistently high services sector inflation, which remained at 4% in December, continued to pose risks to price stability. .
“If interest rates fall too quickly, it will be difficult to get services inflation under control,” Lane told Der Standard.
But the chief economist warned more clearly than in his previous public statements that weak growth is a threat to price stability.
“We also need to make sure that the economy doesn't grow too slowly, because then we face a new problem, which is that inflation could stabilize below target,” he said.
Query for a a recent Financial Times poll in which many economists said the ECB was too slow to cut interest rates, Lane said the central bank was “primarily focused” on inflation rather than growth. However, he added that “growth is the fundamental driver of inflation dynamics.”
But he stressed that policymakers “do not see the risk of a recession that would require a dramatic acceleration of monetary easing,” a sign that the larger rate cut of half a percent that some economists had hoped for was unlikely.
