ECB’s Philip Lane signals need for caution on further rate cuts

‘Good degree of confidence’ that inflation is on way back to 2 per cent

European Central Bank (ECB) chief economist Philip Lane signalled a preference for caution on the pace of further rate cuts after the authority moved last week to cut official interest rates for the first time after an unprecedented spate of hikes.

Mr Lane told an audience at a Banking and Payments Federation Ireland conference on Tuesday that the ECB had waited until after four successive quarterly staff reports predicted that inflation would return to its 2 per cent target in the second half of next year before it cut rates.

Its key deposit rate was reduced last week by a quarter of a percentage point to 3.75 per cent. The ECB governing council had hiked the rate from minus 0.5 per cent to 4 per cent between July 2022 and last September in an effort to tackle inflation.

Headline euro zone consumer price growth has eased from a peak of 10.6 per cent in late 2022 to 2.6 per cent last month.

READ MORE

“We waited quite a long time to really solidify that we’re on the way back to 2 per cent before this cut,” Mr Lane said in his first public outing since the ECB governing council meeting last Thursday.

“In a world of uncertainty, one way to deal with uncertainty is a little bit of waiting – wait, make sure you’re not taking a step that you’re going to regret.”

While Mr Lane said that he had “a good degree of confidence” that inflation was on the way back to 2 per cent, he said the ECB needed to retain flexibility on the pace of further rate moves, given the challenge of pinpointing exactly when the target would be reached.

“We haven’t been though many of these types of episodes, going from very high inflation back to normal inflation fairly quickly,” he said. “And this is why we are trying to reserve for flexibility along the way.”

He said that the ECB was still “far above what’s called a neutral rate”. The consensus view among economists is that the central bank’s neutral deposit rate would be about 2-2.5 per cent.

Elsewhere on the 26-member governing council, Bank of France governor Francois Villeroy de Galhau said on Tuesday that the ECB should neither rush nor procrastinate over future interest-rate cuts after a “decisive orientation” to start loosening last week.

Ifac’s new report: more ‘fiscal gimmickry’ from the government

Listen | 33:25
The Irish Fiscal Advisory Council’s latest report has reiterated their stance that government spending plans risk overheating an economy already at full capacity. Is their plea for caution correct given the corporation tax receipt bonanza that shows little sign of abating in the short-term?Niall Conroy is chief economist with IFAC and he joined host Cliff Taylor on this episode of Inside Business to air the council’s concerns.Plus, there is likely to be a rise in workplace audits after Revenue state commissioned freelance work will ‘generally’ indicate person should be treated as an employee. So, how do you know if you are a freelancer or a company employee? Irish Times journalist Laura Slattery and head of employment law at Addleshaw Goddard, Maura Connolly give some insight into Revenue’s guidance on the issue.#Produced by John Casey with JJ Vernon on sound.

With uncertainty reigning over the ECB’s next steps after its widely expected reduction to borrowing costs last week, the French central banker’s tone differs slightly from the chorus of colleagues who have since called for caution before moving again.

“As regards our next rate cuts, I plead for a ‘pragmatic gradualism’, both on the timing, without haste nor procrastination,” Mr Villeroy said in a speech at the Paris Finance Forum on Tuesday.

The central bank’s president, Christine Lagarde, said the move was justified, but she added in an interview released on Monday that the decision doesn’t mean rates are now on a linear declining path.

In a similar vein, Lithuanian central bank chief Gediminas Simkus said on Tuesday that “it’s too early to raise a victory flag” on inflation. Similarly, Finland’s Olli Rehn acknowledged progress on inflation, but wouldn’t commit to a rate path. – Additional reporting, Bloomberg

Read More

Recommended