Rudolph Angler Eurozone inflation dropped to 2.4% in December 2024, marking significant progress from its 10% peak in late 2022. Despite this improvement, European Central Bank (ECB) chief economist Philip Lane warns of lingering concerns about services inflation and uneven economic growth among member states. Lane stressed that achieving stable inflation at the 2% target requires careful policy adjustments.
“We’ve brought inflation close to 2%, but not all the way,” Lane stated in an interview with Der Standard. He attributed much of the progress to falling energy prices but cautioned that this downward pressure will not continue indefinitely.
A “Middle Path” for Interest Rates
Lane highlighted the delicate balance required in setting interest rates to control inflation without stifling economic activity.
“Interest rates must follow a middle path,” Lane explained. “Lowering rates too quickly could make controlling services inflation harder, while keeping rates too high risks pushing inflation below the target.”
The ECB reduced its key interest rate from 4% in June 2024 to 3% in December. Lane acknowledged market expectations of further adjustments but refrained from specifying future rate levels, emphasizing that the ECB’s policy direction remains clear.
Regional Growth Disparities and Structural Reforms
Economic growth within the eurozone remains uneven, with significant disparities between member states. Lane noted Spain’s robust performance but pointed out challenges in manufacturing-reliant economies like Germany and Austria.
“Some countries grow at solid levels, such as Spain, but others face hurdles due to global manufacturing challenges and energy-intensive industries,” Lane said. He attributed part of these difficulties to the ongoing impact of the Russia-Ukraine war and disruptions in the car industry.
Lane advocated for structural reforms to bolster long-term growth, citing Mario Draghi’s recommendations on competitiveness. “We need to accelerate reforms to integrate Europe’s economy further and create larger domestic markets,” Lane argued. He highlighted fragmented sectors like energy and telecommunications as key areas for improvement.
Balancing Stability and Economic Growth
Lane acknowledged global factors like China’s economic slowdown, which has dampened export prices and created disinflationary pressures. Despite these challenges, he expressed confidence in the ECB’s ability to maintain its 2% inflation target.
“We can achieve our inflation goals if monetary policy remains correctly calibrated and downside risks do not emerge,” Lane said.
With eurozone growth projected at just 1.1% in 2025, Lane emphasized that price stability and economic growth can coexist. “We don’t need to push the eurozone into a recession to achieve price stability,” he affirmed.
The ECB’s focus on structural reforms and balanced monetary policies will be essential in navigating the complex economic landscape and ensuring long-term resilience.