(Bloomberg) -- The European Central Bank should be able to reduce interest rates to a level where they no longer restrict the economy in 2025, according to Chief Economist Philip Lane.
“We aren’t committing ourselves in advance to a precise pace of reduction, but we will have to gradually reduce our rates,” he told Les Echos in an interview. “Monetary policy shouldn’t remain restrictive for too long. Otherwise, the economy won’t grow sufficiently and inflation will fall, I believe, below target.”
Lane highlighted that “much of the final leg of bringing inflation sustainably back to the 2% target will be achieved next year.”
“So I think that next year, in the absence of new shocks, this balance can be reached, so a restrictive policy is no longer necessary,” he said.
The ECB is widely expected to lower borrowing costs again at its next meeting in December, with poor purchasing-manager-index numbers published Friday pushing markets to bet on an outsized half-point move. That’s despite inflation data for November — due later this week — likely showing an uptick above the ECB’s price goal.
“At the moment, inflation is close to that target, but that mainly reflects a combination of lower energy prices and still elevated services inflation,” Lane said. “There is still some distance to go in terms of adjustment for inflation to return to the desired level in a more sustainable way.”
Turning to the euro-area economy, Lane said that “we are in a cyclical recovery phase.”
“This year, we are seeing household incomes improve, with wages in several countries increasing faster than inflation,” he said. “There are good reasons to believe that consumption will increase more strongly next year and in 2026.”
Speaking in a separate interview, his Latvian Governing Council member Martins Kazaks said the ECB should cut rates next month.
“Of course there will be a discussion, but my conviction is that looking at what’s happening at the moment in the European economy, there has to follow another rate cut already in December,” he told Latvia’s public broadcaster on Monday.
One issue that’s hanging over the European economy is the return of Donald Trump to the White House, a move that’s likely to be accompanied by a resurgence in US protectionism.
“Any increase in protectionism is bad for the global economy,” Lane said. “The scale of the problem really depends on the level of protectionism and the speed with which it is implemented. If the increase in tariffs is rapid and universal, European businesses will have little time to prepare for it and the risk of significant disruption will be very high.”
Trump’s election campaign saw the former president pledge 60% tariffs on China and as much as 20% on everyone else — the biggest trade shock since the Smoot-Hawley Act that deepened the Great Depression of the 1930s.
“If protectionism remains partial, that is, it would only weigh on certain products, and if it is implemented only slowly, it will still create a lot of uncertainty,” Lane said. “This could discourage investment in Europe and make consumers reluctant to spend.”
--With assistance from Aaron Eglitis.
(Updates with Kazaks in ninth paragraph)
©2024 Bloomberg L.P.