The European Central Bank (ECB) is poised to shift away from a key inflation-control strategy, signaling a move from its reliance on analyzing current economic data to inform interest rate adjustments.
Philip Lane, the ECB’s chief economist, revealed in an interview on the Financial Times’ Economic Programme with Soumaya Keynes that future monetary policy decisions should eventually focus on anticipating future risks rather than relying on backward-looking metrics. Lane stated, “When the central bank is confident that inflation will reach its medium-term target of 2 percent, monetary policy should be driven by the risks ahead.”
Previously, the ECB and other central banks prioritized two-year inflation forecasts when determining interest rates. However, their inability to predict the prolonged price increases in energy markets—driven by supply chain disruptions and the war in Ukraine—undermined their credibility.
Confronted with decades-high inflation, central banks, including the ECB, began placing greater emphasis on short-term data such as monthly inflation rates, survey data, and quarterly GDP figures rather than long-term projections.
Inflation in the eurozone has significantly declined, dropping from a peak of 10.6 percent in October 2022 to 2.3 percent in November 2023. Despite this progress, short-term data continues to overshadow the central bank’s medium-term inflation forecasts.
Lane emphasized, “While inflation has moved closer to the ECB’s 2 percent target, there is still some way to go.” He noted that services inflation is expected to decline further, aligning with the broader disinflation process.
Lane highlighted the importance of adopting a forward-looking monetary policy once inflation stabilizes, stating: “Once the disinflation process is complete, monetary policy should essentially be forward-looking, scanning the horizon for new shocks that could lead to either more or less inflationary pressures.”
