Eurozone Inflation Set to Slow Further, ECB's Lane Suggets Potential Rate Cuts

Eurozone inflation is expected to continue its downward trajectory, with the European Central Bank (ECB) potentially easing its restrictive monetary policy stance in the coming months, according to a speech delivered by ECB Executive Board Member Philip R. Lane earlier this week.

Lane highlighted a number of factors supporting this optimistic outlook, including a persistent disinflationary trend across various inflation indicators, a moderation in wage growth, and a gradual easing of supply chain bottlenecks.

While headline inflation declined from 5.2% in August 2023 to 2.4% in April, core inflation (excluding food and energy) fell from 5.3% to 2.7% over the same period.

"The improvements in these measures since August 2023 suggest that the observed disinflation has a substantial persistent component," said Lane.

Lane emphasized that further disinflation is expected in the course of 2025, driven by easing labor cost pressures, ongoing profit compression, and the continued dissipation of pandemic-related shocks. He noted that the ECB's wage tracker signals a moderation in overall wage pressures since 2023.

"The sustainable attainment of the medium-term inflation target would be difficult in the absence of sufficient growth to foster the demand conditions that would be aligned with an overall inflation rate of two per cent," Lane stressed.

The ECB's future rate path will be data-dependent and guided by the evolving inflation outlook. Lane indicated that the ECB could potentially reduce its current level of monetary policy restriction at its June meeting if data supports a sustained convergence of inflation towards the 2% target.

"At our June meeting, if our updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase our confidence that inflation is converging to our target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction," Lane stated.

However, Lane cautioned that the pace of rate cuts will be influenced by the trajectory of underlying inflation and demand conditions. The ECB will continue to carefully monitor inflation dynamics and maintain a flexible approach to policy adjustments.

"The subsequent pace of rate cuts will be slower if there are upward surprises to underlying inflation and the level of demand," said Lane, "[and it] will be faster if there are downward surprises to underlying inflation and the level of demand."