The European Central Bank’s battle to return inflation to 2% isn’t won and interest rates must stay as high as necessary to achieve that goal, without harming the economy unduly, according to chief economist Philip Lane.

“The return to target is not yet secure,” Lane said Saturday. “In particular, the monetary stance will have to remain in restrictive territory for as long as is needed to shepherd the disinflation process towards a timely return to the target.”

In remarks for a panel at the Federal Reserve’s annual conference in Jackson Hole, however, he warned that overly tight policy also poses dangers - especially to a eurozone economy that data suggest is losing momentum.

“The return to target needs to be sustainable,” Lane said. “A rate path that is too high for too long would deliver chronically below-target inflation over the medium term and would be inefficient in terms of minimising the side effects on output and employment.”

The comments come as more and more policymakers endorse market expectations for a second reduction in borrowing costs at the ECB’s next meeting, in September. Some are also signaling that another one or two cuts are possible this year beyond that.

The ECB started lowering rates in June, citing increased confidence that inflation would fall back to target in the second half of 2025. Most officials see recent data as in line with that projection and appear to have become more worried about the deteriorating economic backdrop.

Speaking later on the panel, Lane struck a more upbeat tone.

“There’s a lot of momentum in the European economy,” he said. “There should be a lot of recovery.”

Faced with an economy that’s been very strong but may now be starting to weaken, Federal Reserve chair Jerome Powell said Friday that the time has come to begin lowering US rates - affirming expectations that officials will begin trimming borrowing costs next month.

“There has been good progress in delivering the overriding goal of making sure that inflation returns to target in a timely manner,” Lane said. “Crucially, this disinflation process has been underpinned by the forceful transmission of monetary policy to the financial system, the level of demand and inflation expectations.”

  - Bloomberg