Eurozone inflation dropped to 2.4% in December 2024, marking significant progress from its 10% peak in late 2022. However, Philip Lane, the European Central Bank’s (ECB) chief economist, cautioned that stabilising inflation at the 2% target without stifling growth remains a complex task.

In an interview with Der Standard, Lane noted that while lower energy prices had a significant impact on inflation reduction, the trend would not continue indefinitely. He stressed that structural challenges, particularly in the services sector, need addressing to maintain the progress made.

“We’ve achieved remarkable progress in bringing inflation down, but there’s still work to ensure it stabilises near 2%,” Lane said.

Striking a Balance with Interest Rates

Lane highlighted the importance of a “middle path” for interest rates to balance inflation control with supporting economic activity.

“We need to carefully manage interest rates,” Lane explained. “Rates that fall too quickly risk failing to control services inflation. Prolonged high rates, on the other hand, could drive inflation below target, which is equally undesirable.”

In 2024, the ECB reduced its key interest rate from 4% in June to 3% in December. Lane indicated that while markets don’t expect rates to remain static, he avoided forecasting the ultimate target. Instead, he reaffirmed that the ECB’s policy direction aims to maintain stability.

Regional Disparities and Structural Reforms

Lane pointed out uneven economic growth across eurozone member states. While countries like Spain demonstrate strong economic performance, manufacturing-heavy nations such as Germany and Austria face more significant challenges.

“Some countries, like Spain, are growing robustly, but others reliant on manufacturing, such as Germany, face global challenges,” Lane said. He added that energy-intensive industries have been heavily affected by the Russia-Ukraine war.

Lane also emphasised the importance of structural reforms to enhance the eurozone’s competitiveness and long-term growth. Citing Mario Draghi’s report, he outlined the need for deeper integration in fragmented sectors such as energy and telecommunications.

“Expanding markets and ensuring European economies are sufficiently integrated will strengthen resilience to external shocks,” Lane noted.

Long-Term Outlook: Stability and Growth

Lane acknowledged global factors like China’s economic slowdown, which is suppressing export prices and exerting disinflationary pressures. However, he expressed optimism about maintaining the ECB’s inflation target.

“With the correct monetary policy and minimal downside pressures, achieving a 2% medium-term inflation rate is feasible,” Lane said.

Despite a modest growth projection of 1.1% for the eurozone in 2025, Lane argued that economic expansion and price stability are achievable simultaneously.

“We don’t need to trigger a recession to secure price stability,” he emphasised.

The ECB’s focus on structural reforms and a balanced monetary approach will be pivotal in ensuring the eurozone’s economic resilience and long-term stability.