ECB Urges Agility in Monetary Policy Amid Inflation Risks
The European Central Bank (ECB) should continue its flexible approach to monetary policy due to persistent inflation risks in both directions, states Chief Economist Philip Lane.
Although the ECB anticipates inflation to moderate to 2% this year, Lane emphasizes that "reaching this point might take longer than anticipated." Conversely, he warns against an excessively cautious stance that could lead to "below-target inflation dynamics."
Lane suggests a "middle path" in monetary policy, balancing the risks of insufficient or excessive tightening. This approach has resulted in money markets reducing the expected extent of European rate cuts this year, with traders now anticipating 87 basis points of easing compared to 90 beforehand.
Despite the ECB's recent fourth consecutive rate cut, bringing the total easing to 125 basis points since June 2024, it remains unclear when and how much further it will act.
While inflation rebounded to 2.5% in January, the ECB believes it will return to its target within the year. However, the economy remains subdued, as reflected in the unexpected flatline at the end of 2024.
Lane highlights that surveys indicate continued weakness in the euro-area economy in the near term, but maintains that the conditions for recovery are still present.