Posted By Global Banking and Finance Review
Posted on January 15, 2025
FRANKFURT (Reuters) -Euro zone inflation is set to decline this year on more muted wage increases but the outlook is far too uncertain for the European Central Bank to provide an explicit guidance on interest rates, Philip Lane, the bank's chief economist said.
The ECB cut interest rates four times last year and investors see another three or four moves in 2025 as inflation, now at 2.4%, could inch towards the ECB's 2% target in the coming months despite gyrations in the world economy.
Speaking at a Goldman Sachs event in Hong Kong, Lane argued that the big change will be in services inflation, the single largest item in the consumer price basket, which has been stuck at around 4% for most of last year and keeping the overall figure high despite big falls in energy and imported goods.
"We do think services inflation will come down quite a bit in the coming months," Lane said.
A slowdown in wage growth is likely to be the biggest contributor in curbing the rise in service prices but firms are also seeing lower cost pressure, Lane added.
Still, given the outlook is so fraught with risk, including from global trade tensions, the ECB is unable to make an explicit commitment to more interest rate cuts, Lane argued.
"From our point of view, saying here's where we think the future rate path is going to be conveys a sense of certainty that we don't feel," Lane said.
While Lane's comments are among the most cautious, most ECB policymakers, including Christine Lagarde, the bank's president, have made clear that more rate cuts are likely and the question is only about the timing and size of future steps.
Speaking about consumer caution, a key puzzle for policymakers, Lane argued that households are likely to reduce their exceptionally high savings rate, but only moderately.
The household savings rate was at 15.3% in the third quarter of last year, well above the 12% to 13% range before the pandemic, keeping overall consumption depressed and economic growth muted.
However, improved real incomes and lower bank deposit rates are likely to boost spending, even if geopolitical tensions could still weigh on sentiment.
"So, we do think this (high savings rate) is going to come down, but not massively," Lane said.
(Reporting by Balazs Koranyi; Editing by Jamie Freed and Shri Navaratnam)
