FRANKFURT (Reuters) – The fight against inflation led by the European Central Bank (ECB) has entered a “last easy mile” and the institution can therefore continue to slowly lower its key rates, according to two researchers who are preparing to report their findings to central bank governors next week.

The study, by Giorgio Primiceri and Domenico Giannone, will be the first to be presented at the ECB’s annual meeting on Tuesday near Sintra, Portugal.

The two researchers used a model that decomposes inflation into supply, demand and the effect of monetary policy on the latter. They concluded that inflation is heading towards the ECB’s 2% target, barring further shocks.

“This analysis indicates that there are reasons to be optimistic about inflation, both in the immediate term and in the more distant future,” Giorgio Primiceri and Domenico Giannone write in their article.

“In fact, our model predicts an ‘easy last mile’ over the next few quarters,” they add.

According to the document, a drop in inflation to the level of the target set by the ECB is expected for next year. He adds that inflation should remain at this level until 2026, even if the key rate was reduced to 2.5%, compared to 3.75% currently. These observations correspond to market expectations.

Going against the dominant narrative, the authors find that a stronger-than-expected recovery in demand after the COVID-19 pandemic, rather than limited supply, is the main factor behind the rise in demand. inflation in 2021-22.

If the ECB had tightened policy earlier, inflation would have peaked at just 6%, but at the cost of a one percentage point loss in economic output, the paper said.

“Given that economic activity was already challenged by unfavorable supply conditions, this policy likely helped avoid a further substantial decline in economic activity,” the authors said.

(Report by Francesco Canepa, by Augustin Turpin, edited by Blandine Hénault)

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