By David Barwick – FRANKFURT (EconoStream) – It should be quite clear that the European Central Bank cannot afford to be complacent in its efforts to restore inflation consistent with its objective, ECB Executive Board member Philip Lane said Thursday.

In a blog post published on the website of the ECB, Lane, who is also Chief Economist, conceded that incoming economic data were indicative of a ‘strong rebound’ and reiterated the value of ECB policy’s contribution, but struck a clearly dovish tone overall, dwelling on reasons to be skeptical of the economic and inflation outlook.

Lane pointed to the recent low lending rates of banks and their very high volume of lending to corporates as evidence of the effectiveness of ECB measures. He called the ECB’s targeted longer-term refinancing operations (TLTROs) a ‘major force’ behind current credit trends and vaunted the Governing Council’s expansion of the pandemic emergency purchase programme (PEPP) in June as having shifted projected output and inflation upwards.

‘That said, it should be abundantly clear that there is no room for complacency’, he continued. ‘Inflation remains far below the aim and there has been only partial progress in combating the negative impact of the pandemic on projected inflation dynamics. Moreover, the outlook remains subject to high uncertainty and the balance of risks continues to be tilted to the downside.’

Lane suggested that the ECB might not at the moment have needed information: ‘Over the coming months, a richer information set will become available that will help to inform the calibration of monetary policy’, he said, mentioning measures to deal with Covid-19, national budget decisions, Brexit deliberations and the sustainability of the recovery in consumption and investment.

‘The Governing Council stands 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’, he said.

Although the recovery is consistent with the June ECB staff forecasts, it is uneven across countries and sectors and shrouded in uncertainty, Lane said. In particular, manufacturing is further along than services, which August PMI data show slowing, he said.

With households unsure and thus apt to remain cautious in their spending, ‘full normalisation of the savings rate will occur only gradually’, he said. Similarly, corporate investment will also show hesitancy ‘against a background of heightened uncertainty about future demand for their products, spare capacity and weakened balance sheets.’

Even if somewhat better-than-expected growth in 2Q leads to a higher path of output under the mild, baseline and severe scenarios contemplated by ECB staff forecasters, ‘the very high economic, financial and social costs associated with the severe scenario underline the importance of guarding against the emergence of downside risks’, Lane said.

Turning to inflation, Lane said the -0.2% Eurozone HICP recorded for August reflected temporary distortions, but also weaker underlying pressures. HICP would persist in negative territory through the remainder of 2020, and while base energy effects and the expected withdrawal of the German VAT reduction would lead to a recovery of sorts, ‘the recent appreciation of the euro exchange rate dampens the inflation outlook’, he said.