The chief economist of the European Central Bank, Lian En, said that from roughly 2020 to 2021, the European Central Bank is in a long cycle, and the inflation rate has been far below the 2% target. The central bank has adopted negative interest rates and other unconventional policies.
Now, the central bank has entered a different cycle, with inflation higher than the target level for a long time, and the central bank will gradually raise interest rates.
Lane predicted that in a few years, the ECB’s policy rate could drop to around 2%, from 3.75% currently.
In addition, economists also generally expect interest rates to be around 2%.
If the central bank’s policy interest rate and inflation rate are both at 2%, then the real interest rate will be close to zero, which is a low interest rate level.
Lane believes that the global economy needs a long-term, inflation-adjusted real interest rate near zero.
Therefore, the ECB is adjusting in this direction, rather than returning to extremely low (ie -0.5% pre-pandemic) interest rate levels.
