Further interest rate cuts may be on the horizon this year, but a cautious strategy is essential, according to Philip Lane, the chief economist of the European Central Bank (ECB).

Dubliner Lane emphasized the need for the ECB to strike a balance that avoids triggering a recession while also ensuring inflation is curbed in a timely manner.

The ECB implemented four interest rate cuts last year, and market expectations point to another four reductions in 2025, primarily in the first half of the year, as inflation is projected to reach the bank’s 2% target around mid-2025.

“If interest rates drop too quickly, it will be challenging to control services inflation,” Mr. Lane told Der Standard on Monday.

“But we also don’t want rates to remain excessively high for too long, as this could dampen inflation momentum so much that the disinflation process overshoots the 2% target, potentially driving inflation significantly below it.”

He highlighted that reducing services inflation, which remained around 4% throughout most of 2024, is critical to achieving stable price growth.

However, a key contributing factor—wage growth—is expected to decline “significantly” this year, further easing inflation, which stood at 2.4% in December.

Although economic growth has largely hovered just above zero over the past year, Mr. Lane expressed confidence that a recession is not imminent or required to control inflation.

“The conditions for taming price growth are mostly in place already,” he noted.

“The challenge this year will be to navigate a middle path—avoiding actions that are either overly aggressive or overly cautious,” he concluded.