ECB Chief Economist Philip Lane highlighted in a speech that recent data suggest the disinflation process “may run faster than previously expected” in the near term. However, he was quick to note that the implications for medium-term inflation remain “less clear”.
The economic recovery’s strength, fiscal policy paths, wage developments, firms’ capacity to absorb higher input costs, and ongoing geopolitical tensions are all pivotal factors that Lane identified as having an “important bearing” on the inflation trajectory.
Lane also emphasized the significance of March 2024 ECB staff macroeconomic projections as a critical juncture for providing a “comprehensive update” of medium-term inflation outlook.
In terms of policy approach, Lane reaffirmed ECB’s commitment to a “firmly data-dependent approach,” stressing the importance of striking a delicate balance between the risks of overtightening and prematurely easing monetary policy.
“Monetary policy needs to carefully balance the risk of overtightening by keeping rates too high for too long against the risk of prematurely moving away from the hold-steady position,” he stated.
Furthermore, Lane stressed the importance being “further along in the disinflation process” before gaining confidence that inflation will consistently meet ECB’s target in a timely and sustainable manner.