FRANKFURT (Reuters) – Euro zone inflation is set to decline this year with more subdued wage increases, but the outlook is too uncertain for the ECB to provide explicit guidance on interest rates, European Central Bank chief economist Philip Lane said.
The European Central Bank has cut interest rates four times in the past year, and investors expect three or four more moves in 2025, as inflation, now at 2.4%, could move towards the ECB's 2% target in the coming months despite… Fluctuations in the global economy.
Speaking at a Goldman Sachs event in Hong Kong, Lin said the big change will be in services inflation, the largest single item in the consumer price basket, which has been stuck at around 4% for most of last year with the overall figure kept high despite The significant decline in energy and imported goods.
“We believe services inflation will decline slightly in the coming months,” Lin said.
Lin added that the slowdown in wage growth is likely to be the biggest contributor to limiting service price increases, but companies are also seeing less cost pressures.
However, because the outlook is fraught with risks, including global trade tensions, the ECB is unable to make an explicit commitment to further interest rate cuts, Lane said.
“From our perspective, saying this is where we think the future interest rate path will be would convey 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 it clear that further interest rate cuts are likely and that the question is only a matter of the timing and size of future steps.
Speaking of consumer caution, the key conundrum facing policymakers, Lin claimed that households are likely to reduce their unusually high savings rates, but only moderately.
The household savings rate was 15.3% in the third quarter of last year, well above the 12% to 13% range before the pandemic, leading to lower overall consumption and weak economic growth.
However, improving real incomes and lower interest rates on bank deposits are likely to boost spending, even if geopolitical tensions continue to weigh on sentiment.
“So, we think this (high savings rate) will decrease, but not significantly,” Lin said.
