ECB’s Lane: Our Primary Concern Is Too-Low Inflation for Too Long

24 September 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank’s primary concern is not deflation but rather the possibility of below-target inflation for too long, making a high degree of monetary accommodation necessary, ECB Executive Board member Philip Lane said Thursday.

Writing in a Twitter interview, Lane, who is also Chief Economist, suggested that having negative interest rates now would allow a return to positive territory in the future.

‘Rather than deflation risk, our primary concern is inflation remaining below our aim for an excessive period’, he wrote. Lane appeared to attribute the limited risk of deflation to the ECB’s measures, without which, he said, ‘output would be lower and we would face more severe disinflation or even deflation. Ample stimulus is still needed to get back to our inflation aim.’

Questioned about the harmful side effects of interest rates below zero, Lane called negative rates ‘a pathway to positive rates in the future.’ The ECB’s rate cuts have supported favourable financing conditions for firms and households, he said.

Lane allowed only that there had been ‘some recovery’ of the global economy since the first half of the year. Containing the virus is ‘[t]he first priority’, he said, because ‘if there is a sustained surge in cases, this will damage consumer and investor confidence.’

The ECB’s central scenario is consistent with some flare-ups of Covid-19 until the pandemic has been resolved medically, he said. Staff projections assume that such a resolution will be found ‘over the course of next year’, he noted. ‘This would support a recovery in the service sector and put upward pressure on service sector inflation.’

In updating its macroeconomic forecasts on September 10, the ECB said that ‘a satisfactory medical solution (such as a vaccine) is assumed to be found by mid-2021, with a gradual widespread deployment by the end of 2021.’