Eurozone inflation fell to 2.4% in December 2024, marking substantial progress from its peak of 10% in late 2022. However, European Central Bank (ECB) Chief Economist Philip Lane highlighted the ongoing challenges of stabilising inflation while ensuring economic growth.
Lane, in an interview with Der Standard, attributed the decline to falling energy prices but warned that structural issues in services inflation persist. “We’ve made great strides in bringing inflation down, but it’s not yet at our 2% target,” Lane said. “The drop in energy prices helped, but that trend won’t continue indefinitely.”
The Need for a Balanced Interest Rate Policy
Lane emphasised the importance of a measured approach to interest rates to balance inflation control and economic activity.
“We must follow a middle path with interest rates,” Lane stated. “Reducing rates too quickly risks losing control over services inflation. Keeping them high for too long could push inflation below target, which is equally problematic.”
The ECB reduced its key rate from 4% in June 2024 to 3% by December, aiming to stabilise inflation without harming economic momentum. Lane refrained from speculating on future rate levels but stressed that the direction of monetary policy remains clear.
Uneven Growth Across the Eurozone
Despite inflation moderation, economic growth across the eurozone remains inconsistent, with significant disparities among member states.
Lane highlighted Spain’s robust growth as a positive example, contrasting it with struggles in Germany and Austria. “Spain is performing well among the larger economies,” Lane noted. “However, countries reliant on manufacturing, such as Germany, face global challenges, particularly in the car and energy-intensive industries.”
The Russia-Ukraine war has compounded issues for energy-dependent sectors, further slowing growth in some member states.
Structural Reforms Key to Resilience
Lane stressed the need for structural reforms to enhance the eurozone’s competitiveness and ensure long-term economic resilience.
Citing Mario Draghi’s report on strengthening the eurozone, Lane advocated for deeper market integration. “Expanding domestic markets and integrating industries like energy and telecommunications will allow European companies to grow and compete globally,” he said.
He also pointed to global factors, such as China’s economic slowdown, as contributing to disinflationary pressures, while expressing confidence in the ECB’s ability to meet its 2% inflation target in the medium term.
Striking a Balance Between Stability and Growth
Lane reiterated that the ECB’s goals of price stability and economic growth can coexist, even with eurozone growth projected at just 1.1% in 2025.
“We don’t need a recession to achieve price stability,” Lane said. “Our focus is on fostering structural reforms and maintaining balanced monetary policy to ensure resilience and sustainable growth.”
As the ECB navigates this delicate landscape, its commitment to reform and careful monetary adjustments will remain pivotal to securing economic stability.