ECB Relies on Services Prices to Reach Inflation Goals, Says Lane

FRANKFURT - According to Philip Lane, the chief economist of the European Central Bank (ECB), inflation in the Euro zone is anticipated to decrease this year. This decline is expected to result from more moderate wage growth. However, Lane indicated that the future outlook remains highly uncertain, making it challenging for the ECB to offer precise guidance regarding interest rates.

Last year, the ECB implemented four interest rate cuts. Presently, financial markets are projecting another three to four rate adjustments in 2025. This comes as the current inflation rate stands at 2.4%, which could gradually drop toward the ECB's target of 2% in the following months, even amidst fluctuations in the global economy.

Lane shared these insights while addressing participants at a Goldman Sachs event held in Hong Kong. He highlighted that a significant change is likely to occur in the inflation rates related to services. Services constitute the largest component of the consumer price index and have remained around 4% for most of the previous year. This figure has kept the overall inflation rate elevated, despite substantial reductions in the prices of energy and imported goods.

He expressed optimism, stating, "We do think services inflation will come down quite a bit in the coming months." This anticipated decline in service prices is primarily attributed to a slowdown in wage growth, which is expected to be the main factor in curbing the rise of these prices. Additionally, companies are experiencing reduced cost pressures, Lane explained.

Nonetheless, due to the multitude of risks present—particularly those connected to global trade—Lane emphasized that the ECB refrains from making explicit commitments to future interest rate cuts. "From our point of view, saying here's where we think the future rate path is going to be conveys a sense of certainty that we don't feel," he stated.

While Lane's remarks are generally cautious, other ECB policymakers, including President Christine Lagarde, have indicated that further interest rate reductions are likely. The debate now centers on the timing and magnitude of these potential adjustments.

In terms of consumer behavior, which poses a noteworthy challenge for policymakers, Lane observed that households are projected to lower their exceptionally high savings rates, but this reduction is expected to be moderate. The household savings rate reached 15.3% in the third quarter of last year, significantly above the pre-pandemic range of 12% to 13%. This high savings rate continues to suppress overall consumption and dampen economic growth.

However, Lane suggested that improvements in real incomes and decreasing bank deposit rates could stimulate spending, even as geopolitical tensions potentially impact consumer sentiment. "So, we do think this (high savings rate) is going to come down, but not massively," he concluded.ECB, Inflation, Services