ECB's Lane: Monetary Policy Supporting Price Stability; To Adjust if Need Be

25 February, 2020

By David Barwick - NEW YORK (EconoStream) – The European Central Bank sees its current policy stance as providing the stimulus a return to price stability requires, but is ready to make any needed adjustments, ECB Executive Board member Philip Lane said Friday. Speaking at the 2020 US Monetary Policy Forum, Lane, according to a text of his remarks provided by the ECB, cited a range of evidence in support of the various aspects of ECB policy and asserted that the latter would be more effective if properly flanked by fiscal policy. The ECB’s forward guidance on interest rates, he said, is tantamount to an “an automatic stabilisation mechanism” in that it effectively guides expectations of both interest rates and the ECB’s asset purchases. Though this mechanism can cope with short-term fluctuations in the inflation outlook, he said, “the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.” Financial markets understand well the ECB’s linking last September of its forward guidance on interest rates to its net asset purchases as well as to the reinvestment of the principal payments from maturing securities purchased under the asset purchase program, Lane said. “Overall, the available evidence suggests that the ECB’s rate forward guidance has been and continues to be an effective monetary policy tool and that the transmission of forward guidance to financial conditions and the economy has remained stable over time,” he said. Recent Eurosystem estimates indicate that the real neutral interest rate in the euro area has declined significantly since the beginning of the current century and is now potentially negative, said Lane, who also serves as ECB Chief Economist. This fact implies that when short-term policy rates hit the zero bound, they stay there for longer than would otherwise be the case, he said. Negative interest rates are bolstering the real economy via bank loans and corporate investment, Lane affirmed. “Nonetheless, the Governing Council is closely monitoring the risk that the impact of negative rates on bank profitability may impair the transmission of monetary policy to the real economy,” he said. Moreover, monetary authorities realize that easing too far could backfire if the so-called reversal rate is reached, he said, adding that such a level “is not currently binding for the euro area.” “Since the introduction of negative rates, banks have consistently reported in the ECB’s bank lending survey that they view negative rates as supportive of credit creation,” he said. Like the ECB’s negative rates, its asset purchases are also working as intended, Lane suggested. “The experience we have built up over the last five years does not indicate that asset purchases entail diminishing returns over time,” he said. Fiscal authorities have largely left the heavy lifting to the central bank, Lane implied. “While the current mildly expansionary fiscal stance is providing some support, the more fiscal policy contributes to boosting long-term growth potential and providing cyclical stabilisation, the quicker will be the effects of monetary policy interventions on inflation and the economy.”