'We do think the last cycle is done,' Philip Lane told the ECB's annual forum in Sintra. He warned, however, that fresh disturbances — from energy moves to volatile trade and war‑related effects — leave the eurozone outlook uncertain; ECB staff project weak growth ahead while services inflation remains persistent.
Lane's message: last cycle over, new shocks arriving
Philip Lane told the ECB's annual forum in Sintra that the most recent tightening cycle has largely done its job in bringing inflation down from the 2021–22 peak. "We do think the last cycle is done," he said, while adding the bank must stay ready to act if deviations from the medium‑term outlook become entrenched.
Lane said the ECB has mostly removed the price shocks that followed the energy crisis and supply constraints, but warned new forces are now at play and that policymakers must avoid overreacting to short‑lived blips while not missing persistent shifts.
Why measuring the war's shock is hard
Lane did not quantify the size of any war‑related shock, instead describing an economy affected by multiple interacting influences:
- Energy‑price episodes can feed through unevenly across countries and sectors.
- Exchange‑rate swings alter import costs and inflation pass‑through.
- Services inflation has proved stickier than expected, keeping domestic price pressure alive.
At a Confederation of British Industry workshop later in the year, Lane presented slides showing fragile growth, weak investment, uneven export volumes and a decoupling between US and euro‑area exports — a pattern that complicates forecasting the external demand shock from the war.
Growth, inflation and the 'neutral' rate debate
ECB staff projections cited by Lane point to a shallow growth path for the eurozone, with modest growth in the near term. Services inflation remains elevated relative to headline figures and projected labour‑cost rises were highlighted in the presentation.
That mix helps explain why Governing Council members settled on a policy rate of about 2% as roughly neutral. Lane said the bank must balance avoiding cuts that would accelerate domestic costs into a wage‑price spiral against keeping policy tighter than necessary if growth softens.
Trade shocks, exports and energy assumptions
Lane emphasised a "volatile global trade environment" and underlined that external demand will be an important driver of any recovery. His slides looked more optimistic for exports beyond the very near term, but the present picture was fragile.
Commentators who reviewed the presentation noted the outlook depends heavily on assumptions about future energy prices and the pace of services disinflation; if energy stays higher or services disinflate slowly, achieving stable 2% inflation would take longer.
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For now the bank has set its policy rate at about 2% — down from a 4% peak — a level Lane described as roughly neutral, even as services inflation and external shocks complicate the recovery.
This article was created with AI assistance.
