ECB’s Lane: ‘We Have a Clear Vision of the Exit From This Pandemic’

18 December 2020

By David Barwick – FRANKFURT (Econostream) – The way out of the pandemic now appears clear, but it will still take time, European Central Bank Executive Board member Philip Lane said on Friday.

In a podcast on the ECB website, Lane, who is also chief economist, said the ECB was confident that the recovery would bring an important improvement in the outlook for inflation.

Although 4Q is likely to bring economic contraction, ‘we remain very confident and now the news of the vaccine, I think we have a clear vision of the exit from this pandemic’, he said.

On the basis of the experience of 3Q, it is apparent that ‘the economy can come back quite quickly’, he said. ‘So we are quite confident that there will be a significant recovery in the economy and in inflation prospects.’

With the rollout of vaccines the ECB feels certain that ‘there will be a good recovery’, he reiterated, ‘but it’s going to take a while. The vaccine will not instantaneously create the new jobs, create the new demand.’

This explains the ‘mismatch’ in the sense that while financial markets can immediately incorporate the risen optimism, ‘the economy will take those 18 months’ and only return to 2019 output levels ‘towards the second half of 2022’, he said.

The ECB’s role meanwhile is ‘making sure the financing conditions are there, to make sure that there’s no interruption to the recovery process, that’s our job’, he said.

The recalibration of its policy instruments on December 10 was ‘to form the bridge from now’ to spring 2022, he said.

According to Lane, the ECB was also conscious of the need to ‘make sure that fiscal policy can uptake the funding needed to provide the fiscal support we need.’ This reflects in particular the fact that the EU recovery fund is very important and ‘will essentially be a major driver of economic activity for the next five years.’

As for short-term interest rates, these are always ‘the most important policy tool any central bank has’, he said. Their low level in the euro area is ‘because that very low level essentially enables and is a platform both for the PEPP [pandemic emergency purchase programme] and for the targeted lending programme’, he said.

‘The efficient route is not so much to have further cuts in the policy rates right now, but to focus on having the support for the longer-term funding’, he added.