ECB to pursue 'middle ground' plan for rate cuts this year

ISTANBUL

The European Central Bank (ECB) plans to further loosen its policy rates this year but must strike a balance to avoid both a recession and delays in reducing inflation, ECB chief economist Philip Lane said.

“If interest rates fall too quickly, it will be difficult to bring services inflation under control,” Lane told Austrian newspaper Der Standard.

“But we also don’t want rates to remain too high for too long, because that would weaken inflation momentum to the point where the disinflation process could fall below 2% rather than stabilizing there,” he added.

With inflation expected to reach the ECB’s 2% target by mid-2025, the ECB made four interest rate cuts last year and expects to make another four this year, the majority likely in the first half of the year.

Lane emphasized that reducing services inflation, which has stayed around 4% for most of 2024, is crucial to controlling price increases.

This year, however, wage growth, a key driver of pricing pressures, is expected to be “significantly” lower, ensuring further reductions in inflation, which stood at 2.4% in December.

Lane also stated that while economic growth has been near zero for much of the past year, he did not foresee the kind of recessionary risks that would require sharp monetary easing.