(Bloomberg) -- The European Central Bank must keep an open mind about the pace of interest-rate cuts as lingering risks in the global economy could still shift the outlook for inflation, according to Chief Economist Philip Lane.
Wage growth, profits and geopolitical tensions could push up energy prices and freight costs, creating new upward pressure on prices, Lane said Wednesday. On the other hand, a protracted hit to confidence could bring down inflation, while an increase in trade friction would make the outlook more difficult to model, he said.
“In the current environment of elevated uncertainty, it is prudent to maintain agility on a meeting-by-meeting basis and not pre-commit to any particular rate path,” Lane told an event organized by MNI. “In terms of risk management, monetary easing can proceed more slowly compared to the interest rate path embedded in the December projections in the event of upside shocks to the inflation outlook and/or to economic momentum.”
“In the event of downside shocks to the inflation outlook and/or to economic momentum, monetary easing can proceed more quickly,” he added.
ECB officials across the spectrum have signaled further interest-rate cuts after the fourth quarter-point reduction of the year last week. Most have indicated that they’re willing to bring borrowing costs to a neutral level that neither restricts nor stimulates economic activity.
They differ on where exactly neutral is, however. Executive Board member Isabel Schnabel argues that the deposit rate – currently at 3% – is already approaching this level. Others, like France’s Francois Villeroy de Galhau, still see ample room for easing.
Policymakers also have different views on whether there’ll be a need to go below neutral, to perk up a euro-area economy that’s struggling for momentum. Investors are currently expecting four to five more quarter-point cuts in 2025.
Lane said that while domestic inflation is still high, “it should come down as services inflation dynamics moderate and labor cost pressures ease.”
“We are determined to ensure that inflation stabilizes sustainably at our 2% medium-term target,” he said. “We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.”
--With assistance from Jana Randow.
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