ECB Confident in Inflation Stabilization, Rehn Says

The European Central Bank (ECB) is optimistic about its ability to stabilize inflation at its 2% target, according to Finnish central bank chief Olli Rehn. In a speech on Wednesday, January 22, 2025, Rehn expressed confidence that inflation will stabilize as predicted, and monetary policy will stop being restrictive in the near future. This optimism aligns with recent macroeconomic projections and market expectations.



The ECB's confidence is supported by several key factors:

1. Disinflation process is well on track: Inflation has been declining rapidly, with headline inflation coming down quickly in 2023 and more gradually in 2024. The decline in 2024 was more gradual but still in the right direction, with inflation averaging 2.4% over the year. (Source: Speech by Luis de Guindos, Vice-President of the ECB, at the 15th edition of Spain Investors Day, Madrid, 15 January 2025)
2. Most measures of underlying inflation suggest a return to the 2% target: The ECB's Persistent and Common Component of Inflation, which has the best predictive power for headline inflation over the one to two-year ahead horizon, has been around 2% for more than a year. (Source: Speech by Luis de Guindos)
3. Wage growth has been moderating: Wage growth has been slowing down, which should help to bring inflation back to the target. The Wage Tracker developed by the Central Bank of Ireland in collaboration with Indeed has moved within a range of 3.5 – 4% for the euro area since the beginning of the year, with the most recent data for July at 3.8%. (Source: Blog post by the Central Bank of Ireland)
4. Energy and supply-side shocks are fading: The impact of energy and supply-side shocks, which contributed to the high inflation rates in 2022 and early 2023, is expected to fade further in the coming months. (Source: Speech by Luis de Guindos)



However, the ECB acknowledges that there is some uncertainty around this baseline forecast, and more persistent services inflation and stronger than expected wage growth could impact the forecast. (Source: Speech by Luis de Guindos)

In the near future, the ECB will continue to monitor these factors and adjust its monetary policy accordingly. The ECB's staff projections expect inflation to average 2.1% in 2025 and to return sustainably to the target rather early in the projection horizon. (Source: Speech by Luis de Guindos)

The ECB's monetary policy stance, particularly interest rate adjustments, plays a crucial role in influencing the path to inflation stabilization. The Governing Council has made substantial progress in bringing inflation back to target by cutting interest rates four times since last June, by a total of 100 basis points. This has contributed to the disinflation process, with headline inflation coming down quickly in 2023 and more gradually in 2024. The decline in inflation is expected to continue, with the December Eurosystem staff projections expecting inflation to average 2.1% in 2025 and to return sustainably to the ECB's 2% target.

However, the ECB is also aware of the risks to economic growth, which remain tilted to the downside. The balance of macroeconomic risks has shifted from concerns about high inflation to concerns about low growth. The outlook is clouded by uncertainty driven by potential global trade frictions, macroeconomic fragmentation, geopolitical tensions, and fiscal policy concerns in the euro area.

In conclusion, the ECB's confidence in inflation stabilization is well-founded, supported by recent macroeconomic projections and market expectations. The ECB's monetary policy stance, particularly interest rate adjustments, is a key factor in influencing the path to inflation stabilization. The Governing Council will continue to monitor the economic developments and risks to price stability in its monetary policy decisions.