European Central Bank Chief Economist Philip Lane expressed cautious optimism that inflation was slowing in an interview with an Irish business publication, but said a lot more data was needed before he would be comfortable declaring victory.
Having raised rates at each of its past nine meetings, the ECB is now debating whether to hike again on Sept. 14, perhaps for the last time in this tightening cycle to ensure it hits its 2% inflation target, or if it should pause given a rapid deterioration of the growth outlook.
Speaking to Ireland’s The Currency in an interview published on Tuesday, Lane said flash data last week showing an easing in underlying price pressures was “very welcome” news in line with the bank’s June prediction.
“But as I said, one month of data is only one piece of information: We need to see that continue,” he said.
“The detailed inflation data don’t come out until the middle of the month. So we will have to see,” he said.
The bank faces a quandary as its deposit rate is already at a more than two-decade high and economic growth has stagnated for the past three quarters, but services price growth is stubborn and wages are still rising quickly, pointing to persistent price pressures.
Markets only see a one-in-four chance of a hike on Sept. 14 but still expect that a 25 basis points increase to 4% will happen before the end of the year, before rate cuts from mid-2024.
Lane urged patience, citing the bank’s June forecast that a lot of the 2022 surge in inflation would fall away in 2023, with further progress in 2024 and in 2025 in a “a multi-year process.”
“Ten percent inflation doesn’t collapse to 2% very quickly, but … it’s already halved from 10 to five, with further progress expected this year,” Lane said.
The ECB expects “some bumpiness” in the easing of energy and food inflation but very strong price increases a year ago would “fall out of the data this autumn,” he said.
Oil and gas prices remain a major source of uncertainty, while a second round of inflation caused by wage rises still has to play out to some extent, according to Lane.
Fears that strong European tourism would lead to quite strong services inflation have been eased by recent data, he said.
“Services inflation remains significant but the fact that there was some easing, I think, helps to limit that narrative,” he added.