ECB Policymakers Shift Focus to Inflation Undershoot Risk
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In a noticeable shift in tone, European Central Bank (ECB) policymakers are increasingly expressing concern over the risk of inflation falling below their 2% target, reports Reuters. This comes after years of grappling with excessively high inflation.
While eurozone inflation dipped to 1.7% last month and is projected to reach the 2% target by early 2025, several ECB officials warned that a weak economy and continued restrictive monetary policy could push inflation too low.
Speaking at an event in New York, French central bank chief Francois Villeroy de Galhau cautioned, “There is… (a) risk that inflation undershoots, especially if growth remains subpar." He stressed the need for the ECB to remain flexible and act promptly with rate cuts to avoid falling behind the curve.
Echoing these sentiments, Portuguese central bank head Mario Centeno, who has consistently advocated for a cautious approach to rate hikes, highlighted the significant downside risks to inflation stemming from the region's economic weakness.
Olli Rehn, Finland’s central bank chief, added his voice to the chorus, stating that the deteriorating growth outlook could exacerbate disinflationary pressures, warranting careful consideration from the ECB.
The eurozone economy has been close to stagnating for almost two years now and a recovery long predicted by the ECB keeps getting delayed. This situation is leading some economists to think that the bloc is facing structural weakness and a rebound is not coming in the foreseeable future, according to Reuters.
Despite these concerns, ECB President Christine Lagarde maintained a more composed stance, reiterating the central bank's expectation that inflation would return to the 2% target next year. However, she acknowledged the possibility of an earlier return than the official projection of late 2025.
These pronouncements from key ECB figures come amidst growing market speculation of further interest rate cuts. Investors are already betting on a reduction in borrowing costs at each upcoming ECB meeting through the spring.