ECB’s Lane Shows a Hawkish Side, but More Action Not off the Table

13 October 2020

By David Barwick – FRANKFURT (EconoStream) – The interview that appeared Sunday with European Central Bank Executive Board member Philip Lane showed a side of the ECB’s chief economist observers may not be accustomed to. The relatively hawkish sentiments expressed by Lane should not delude anyone into too heavily discounting further monetary stimulus later this year.

Perhaps most notable about the interview with the Wall Street Journal was how strongly he downplayed the importance of the euro’s appreciation. While he had not been at the forefront of those complaining about the currency’s strength, Lane had asserted in a blog post on September 11 that ‘the recent appreciation of the euro exchange rate dampens the inflation outlook.’ Last Tuesday, he said the euro was among things ‘expected to continue to act as headwinds’ on price pressures.

All that was and remains true; the point is what monetary policymakers choose to focus on when communicating. Asked now by the WSJ how concerned he was by the exchange rate, his choice was to put the euro in perspective, calling economic slack ‘by far the biggest issue for inflation’ and citing a range of other factors. As for the exchange rate, ‘…it's important not to put that at the centre of policymaking, because it's not. … it’s just one of many factors. And compared with the core issue, which is the pandemic itself, it in no way ranks in the same category as that.’

On the outlook in general, Lane struck a more upbeat tone than he had a month ago, when he dwelt on reasons for scepticism, or even last week, when he fretted that ‘the resurgence in infection rates … is posing renewed challenges’.

Now, he noted that the ECB’s baseline scenario already included ‘temporary outbreaks and temporary resurgences’ so that ‘[i]t’s not too surprising that there's some pick-up in the virus right now.’ This doesn’t necessarily change anything, he added: ‘If it's shown that you can control the virus with serious but not universal restrictions, then that's more or less in line with our baseline.’

In the same vein, he identified various new reasons for economic optimism, calling ‘quite important’ the ‘significant recovery’ of China’s economy and the ‘fact that, by and large, the world economy is looking better than it did a few months ago’. He also cited as positive the reopening of Europe’s manufacturing sector and the deployment of fiscal policy support in emerging economies, and asserted that it had been ‘always clear’ that the pace of the recovery would change after the initial rebound.

As for inflation, currently negative readings are due to ‘some purely temporary factors’ such as the German VAT reduction and the ‘huge amount of slack’ in the economy, he said. Given ‘there’s going to be a lot of reduction in slack next year, he said, ‘inflation is going to climb.’

True, the inflation outlook was not ‘satisfactory’, he conceded, but he immediately qualified that by observing that ‘a lot is going on this autumn’ and that the September revisions to the staff macroeconomic forecasts hadn’t incorporated 2021 budget plans yet to be announced.

Asked point-blank whether, given all this, the ECB would have to act anew, Lane didn’t even regurgitate the mantra about monetary authorities’ willingness to move. Instead, his answer linked the outcome of policy deliberations to incoming information.

‘More than usually the incoming data will tell us a lot’, he said. ‘It really is a unique period of uncertainty. But along some dimensions the uncertainty will diminish in the autumn because we’ll know more about the outlook for 2021.’

Of course, the ECB is normally data-dependent, whether pointed out or not. In emphasizing this dependency, Lane probably just wished to dispel the notion that more stimulus is a done deal. That by no means takes it off the table, and it is clear that there are Council members whose arm wouldn’t need much twisting for them to support more action.

And despite what Lane said about December 10 as a potential occasion for more accommodation, the possibility remains alive. Asked namely if that monetary policy meeting of the Governing Council in particular could be key, Lane suggested not focussing ‘on any one meeting. It’s not the case that we only look at the formal projection rounds.’

In practice, it is rare that the ECB does anything major without being able to point to updated staff forecasts that help underscore the need for a change of stance. A recent exception was the announcement of the pandemic emergency purchase programme on March 18, six days after the previous monetary policy meeting, but that was an emergency situation.

So, barring events that would precipitate taking measures sooner, December 10 satisfies the criterium of being the next date for the macroeconomic projections to be revised, while at the same time allowing a suitable interval during which, in Lane’s own important words, ‘the uncertainty will diminish’. And during which, quite likely, some Council members will be chafing at the bit to act for the first time in more than six months.

It is understandable that the ECB would prefer to go into the December policy meeting – let alone the one later this month - without feeling pressured by financial market expectations to deliver. Anything the ECB chooses to do is that much more effective if not already discounted.

And of course, if developments really don’t warrant action, the ECB can avoid disappointing markets that would probably be happier with action whether warranted or not. But after so much dovishness recently, not least from Lane, the groundwork for a steady-hand outcome in December would probably have to be more thoroughly laid in the weeks to come, and in particular on October 29. Until then, Lane’s relatively hawkish turn should be treated cautiously.