ECB Relying on Services Inflation to Achieve Target

FRANKFURT - The European Central Bank (ECB) anticipates that inflation in the Eurozone will decrease this year, largely due to slower wage growth. However, Philip Lane, the chief economist of the ECB, noted that the economic outlook remains highly uncertain, preventing the bank from providing clear guidance on future interest rates.

Last year, the ECB lowered interest rates four times. Market analysts are predicting two to four additional cuts in 2025, as current inflation stands at 2.4%. This figure is expected to move closer to the ECB's target of 2% in the upcoming months, even with fluctuations in the global economy.

At a recent event hosted by Goldman Sachs in Hong Kong, Lane emphasized that a significant factor influencing inflation will be services prices. Services constitute the largest portion of the consumer price index and have been relatively stable at around 4% for much of the previous year. This stability in services prices has kept overall inflation elevated, despite sharp declines in energy and imported goods prices.

Lane expressed optimism, stating, "We do think services inflation will come down quite a bit in the coming months." He explained that a deceleration in wage growth will play a crucial role in moderating the rise of services prices. Additionally, businesses are currently experiencing reduced cost pressures, which may further help in this regard.

Despite these expectations, Lane cautioned that due to numerous external risks, including ongoing global trade tensions, the ECB cannot firmly commit to a specific path for interest rate cuts. He stated, "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."

While Lane presented a cautious outlook, it aligns with the views of most ECB policymakers, including Christine Lagarde, the bank's president, who have indicated that further rate reductions are on the table. The ongoing discussion primarily revolves around when and by how much rates will change.

Addressing consumer behavior, Lane highlighted a noteworthy observation about household savings. He noted that families are likely to reduce their exceptionally high savings rate, although this reduction will be moderate. The savings rate was recorded at 15.3% in the third quarter of the last year, significantly higher than the pre-pandemic range of 12% to 13%. This elevated savings rate has contributed to subdued overall consumption and slow economic growth.

Nonetheless, Lane pointed out that improvements in real incomes and declining bank deposit rates are expected to encourage increased spending, although geopolitical tensions could dampen consumer sentiment. He concluded, "So, we do think this (high savings rate) is going to come down, but not massively."

ECB, Inflation, Services