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The European Central Bank’s chief economist has highlighted that achieving the bank’s target of 2 per cent inflation is still uncertain. He mentioned that interest rates will need to remain restrictive for the time being.
Philip Lane addressed the issue at the Kansas City Federal Reserve’s annual global symposium in Jackson Hole, Wyoming, stating that progress has been made in controlling price pressures in the Euro area. However, he expressed caution about the extent of relief the ECB can offer borrowers.
He emphasized, “The path to reaching the target is not yet secure. The monetary policy will need to stay restrictive to guide the disinflation process towards achieving the target in a timely manner.”
The ECB was one of the first central banks in advanced economies to start easing policy by reducing its key deposit rate in June. Markets anticipate two more rate cuts by the ECB this year, with the next one expected in September.
Meanwhile, Lane’s counterparts in the US and Bank of England are deliberating on the extent of interest rate cuts amidst declining inflation and softening labor markets.
During the symposium, Fed chair Jay Powell hinted at a rate reduction in September, indicating that it was time for policy adjustments based on incoming data and the evolving economic outlook.
Bank of England governor Andrew Bailey also expressed cautious optimism regarding inflation but refrained from declaring victory prematurely. The BoE recently lowered interest rates and is projected to keep them unchanged in September, with a potential cut in November.
Policymakers are now focusing on protecting their economies from potential risks as inflation recedes. Lane stressed the importance of a sustainable return to the inflation target to avoid prolonged below-target inflation and its adverse effects on output and employment.