ECB chief economist cautions that inflation target is ‘not yet secure’

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The European Central Bank’s chief economist has cautioned that the bank’s goal of getting inflation back to 2 per cent is “not yet secure” as he said interest rates will need to stay restrictive for the time being.

Philip Lane told the Kansas City Federal Reserve’s annual global symposium in Jackson Hole, Wyoming, that there had been “good progress” so far in taming price pressures across the Euro area. Yet, he struck a circumspect tone about how much relief the ECB will be able to provide borrowers.

“The return to target is not yet secure,” he said on a panel on Saturday. “The monetary stance will have to remain in restrictive territory for as long as needed to shepherd the disinflation process towards a timely return to the target.”

The ECB was one of the first movers among central banks in advanced economies to begin easing policy, cutting its key deposit rate by a quarter-point in June. It was the first such move in almost five years.

Markets expect the ECB to lower interest rates twice more this year, with the next move set for September.

Lane’s comments come as his peers in the US and Bank of England debate how much to lower interest rates now that inflation has come down and labour markets have started to soften.

Speaking at Jackson Hole on Friday, Fed chair Jay Powell sent his strongest signal to date for a September rate reduction, saying “the time has come for policy to adjust”.

“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,” Powell said.

Later on Friday, Bank of England governor Andrew Bailey said he was “cautiously optimistic” about inflation, but it was “too early to declare victory” after an extended period of elevated price rises.

The BoE lowered interest rates in August in a knife-edge vote and is expected to hold rates unchanged in September, with another cut priced in for November.

Now that inflation has retreated, policymakers appear increasingly focused on safeguarding their respective economies from undue harm.

Lane said the return to the inflation target needed 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 minimising the side-effects on output and employment,” he said.