ECB Chief Economist Suggests Restrictive Stance ahead of Rate Cuts

A top official at the European Central Bank (ECB), chief economist Philip Lane, shared with the Financial Times that while the ECB is prepared to decrease interest rates in the coming month, a restrictive policy stance must be maintained throughout this year due to wage growth projections not normalizing until 2026.

Lane implied that the ECB is likely to fulfill its promise of a rate reduction on June 6, with expectations in the market now adjusted to anticipate only one additional cut for this year. He emphasized the importance of remaining within a certain level of restrictiveness while potentially easing restrictions to a certain extent.

Regarding future policy meetings, Lane did not directly address the July session, but a number of ECB policymakers, including board member Isabel Schnabel, have suggested that a second rate adjustment should not occur too hastily. Lane highlighted that discussions around normalizing policy could take place once wage growth significantly slows down next year.

The ECB’s current deposit rate of 4% has been noted to impede economic growth, and Lane stressed that initial rate cuts aim to alleviate restrictions rather than provide direct stimulus. He expressed the need for continued progress on inflation before transitioning from a restrictive phase to a normalization phase.

Lane emphasized the importance of keeping interest rates at a restrictive level throughout the year to prevent inflation from veering above the bank’s targeted range. He warned that such a scenario would be challenging to remedy. Despite recent indications of an increase in a key wage metric, Lane indicated that a gradual slowdown was anticipated and that adjustments this year would proceed steadily.