The European Central Bank (ECB) signaled a potentially concluded phase in its monetary policy as the euro zone’s inflation rate dropped to 1.9% for May, falling below the central bank’s target of 2%. This development comes after a prolonged period marked by price shocks stemming from the energy crisis and supply chain disruptions experienced in 2021 and 2022. ECB Chief Economist Philip Lane declared victory, claiming the central bank had averted the shocks in prices. This produced an unprecedented reduction of inflation, which fell from a high of 10%.
In recent panel conversations at the ECB’s annual forum that took place in Sintra, Portugal, Lane underscored the need to stay on guard. Even he conceded that the current inflation path looks locked in. The central bank should be prepared to address any future shortfalls that do come up.
“We do think the last cycle is done, bringing inflation down from the peak of 10%, back to 2%, that element is over, but on a forward-looking basis we do need to stand ready to make sure that any deviation we see does not become embedded, does not change the medium-term picture.” – Philip Lane
During the last year, the ECB has done this incrementally, reducing its key interest rate each month. It currently sits at 2%, after a previously high watermark of 4%. Indeed, current money market pricing suggests more cuts to come. Forecasters perceive at least a 1-in-4 chance of a quarter-point rate cut, lowering the rate to 1.75% by the end of this year. This possible amendment points to continuing concerns over the pace of economic growth in America’s heartland. Over the past two years, the growth has been quite modest.
In opening remarks, Belgian central bank chief Pierre Wunsch laid out the obstacles to a sustainable European economic recovery. Specifically, he stated that risks to inflation as well as growth in the euro area have now shifted to the downside. Wunsch acknowledged the progress made towards achieving the ECB’s inflation target, stating that “there is a broad consensus that we are very close to [the ECB’s 2% inflation] target now, the job is mostly done.”
Even with this progress, both Lane and Wunsch emphasized that a number of global uncertainties may stymie a significant rebound in Europe’s fortunes anytime soon. The external shocks are still reverberating and will continue to affect economic conditions and cloud the outlook for growth.
“If we have to move more it probably will be to the downside, a further cut. I’m not pleading for one, but I think if there is any discussion it’s more in that direction.” – Pierre Wunsch
Such comments show that the ECB is not shying away from the current difficult economic context. It remains focused on stamping out inflation and fostering sustainable growth across the euro zone.