Lane: As Inflation Falls, the European Central Bank Will Abandon Its Crisis Strategy

According to Financial Times, the European Central Bank (ECB) is preparing to ring the bell on one of the fundamental strategies used by the Eurozone’s rate-setters to tame the worst inflation period in a generation, moving away from its focus on the latest economic data to decide whether to cut interest rates.

ECB's chief economist, Philip Lane, stated in an interview with Soumaya Keynes from the Economic Program of the Financial Times that once the central bank is confident that inflation will reach its medium-term target of 2%, monetary policy decisions at some point in the future should be “driven by upcoming risks rather than being backward-looking.”

Prior to the post-pandemic surge in inflation, the ECB and other major central banks placed great importance on their forecasts for where inflation would be two years down the line when deciding on interest rates. However, their inability to foresee the persistence of price increases in energy markets—due to supply chain disruptions and the impact of the war in Ukraine—has made it difficult for rate-setters to maintain their credibility.

Lane emphasized that even though inflation may be approaching the ECB's target of 2%, “there is still a bit of distance to go.” He indicated that since the ECB expects to reach its 2% target over the course of 2025, this might be the point at which the central bank could return to a pre-2022 mode next year.

Lane stated, “At some point, we will transition from a very significant disinflation battle to a struggle to keep inflation sustainably at 2%,” while refraining from commenting on when exactly this transition would occur, though he mentioned that there would be a shift towards a “more sustainable neighborhood around 2%” throughout the coming year.

Some analysts hope that the ECB will start to shift its tone regarding its future stance at its next policy meeting on December 12. It is expected that on December 12, the ECB will lower its key deposit rate by another quarter point to 3%, a level still considered moderately restrictive.

Lane hinted that the ECB might not completely abandon its focus on short-term data. “While data dependency will fall down the list of priorities, assessing emerging risks on a meeting-by-meeting basis will be the new challenge,” he said.