ECB chief economist confident inflation will reach 2% soon – Interest rates

The most recent macroeconomic data inspires greater confidence that inflation in the Euro Zone should return to the 2% target, considers the chief economist of the European Central Bank (ECB), Philp Lane, in an interview with the Spanish newspaper El Confidencial.

“The June meeting is still several weeks away, but the April numbers are important. Both the flash estimate of Eurozone inflation in April and the GDP data for the first quarter improved my confidence that inflation will soon return to target”, said the person responsible for the initial presentations at the ECB governors’ monetary policy meetings. Thus, “today, my level of confidence has improved, compared to the April meeting, but we will receive more data in June”, highlighted Philip Lane.

The former governor of Ireland’s central bank also highlighted that “at the moment, the market believes that there will be a cut in interest rates [em junho]so the reduction would not be a surprise”.

Slowing down for three consecutive months, the inflation rate in the Euro Zone experienced a small setback in April. Eurostat’s quick estimate, released at the end of April, indicates that the year-on-year variation in the consumer price index (HICP) will have stabilized at 2.4%.

Still, despite this number “being an important part of the information” that the ECB was waiting for, it is necessary to take into account that when the central bank meets again in June it will also have on the table the quick estimate on the evolution of May prices, as well as “information on wage dynamics”, highlighted Lane, for whom “there is no need to make statements with excessive certainty”, thus repeating the ECB president’s mantra, that is, that more data is needed before starting to cut reference rates.

Possible difference in speeds between Fed and ECB “should not be exaggerated”

Among the scenarios projected by some investors and investment houses, such as JPMorgan or Bankinter, the possibility of the ECB anticipating the North American Federal Reserve (Fed) in interest rate cuts is on the table. Faced with this possibility, Philp Lane responded that “one should not exaggerate” in measuring the impact of the Fed’s decisions on the inflation outlook and the progress of the European economy.

This is because “the US economy and interest rates affect the Eurozone in different ways and, essentially, these mechanisms work in opposite directions”, he said. “Some see the possibility of a devaluation of the euro against the dollar, but on the other hand, if the US offers high interest rates [no mercado de dívida]that would put pressure on bond rates in Europe, which would basically have the opposite effect of depreciation,” Lane added.

When asked about the fact that some banks in the Euro Zone are paying deposits at lower levels than in other monetary tightening cycles in the region, the ECB’s chief economist warned that this is a sign of a lack of competition.

“In countries where deposit rates have not risen much indicates that there is insufficient competition for savings. It also indicates insufficient investment because, obviously, if there was a lot of demand from companies and families, the interest in accepting deposits would be greater”.

These high levels of savings have mainly to do with “the situation in Europe, including Russia’s war against Ukraine”. Furthermore, “the increase in energy prices two years ago still has” effects on this issue, explains Lane.

The average interest rate on new household term deposits recorded the first drop in January since September 2022. With the reduction in the average rate, Portugal “decreased one position in the group of euro area countries”, indicates the Bank of Portugal .