Eurozone inflation fell to a three-year low of 2.4% in April from a peak of more than 10% in 2022. It is forecast to rise to 2.5% when May data is released later this week.
advertisementThere are indications that the European Central Bank (ECB) may be planning to cut interest rates when it meets next month.
“Absent some major surprises, there are enough factors at present to allow us to lift the highest level of restrictions,” European Central Bank chief economist Philip Lane said in an interview with the Financial Times.
If it cuts rates when it meets on June 6, during European elections, the ECB would be the first to do so among other major central banks, which have been criticized for raising rates too slowly after inflation soared three years ago.
Eurozone inflation is currently approaching the ECB's 2% target, leading investors to believe there is room for the central bank to cut its benchmark deposit rate by 0.25%. It is currently at 4%.
Some central banks have already lowered borrowing costs, but the US Federal Reserve and the Bank of England are yet to act.
Asked if he was pleased that the ECB could cut interest rates faster than other banks, Lane told the Financial Times: “Central banks want to be as boring as possible, and I hope that they want to have as few egos as possible.”
He explained that inflation in Europe has fallen more quickly than in other regions because the war between Russia and Ukraine following Russia's invasion of Ukraine has hit Europe hard.
Energy prices hit Europe hard
“The war and the energy crisis have been costly for Europe,” he told the Financial Times. “But it was a first step. [in starting to cut rates] “This is a testament to the effectiveness of monetary policy in ensuring that inflation is contained in a timely manner. In that sense, I think we have been successful.”
He went on to explain that it was important to keep interest rates tight to prevent inflation from rising again and exceeding the central bank's target, which he said would be “very problematic and probably quite painful to get rid of.”
Addressing where potential pressures for inflation could come from, Lane said “still significant cost pressures” from rapid wage growth that are pushing up services prices mean bank policy will need to remain tight through to 2025.
“As inflation gets measurably closer to our target next year, we will certainly see interest rates fall to a level consistent with that target. That's a separate discussion for another time,” he told the Financial Times.
