ECB’s Lane: Pandemic Still a Threat to Price Stability; Favourable Financing Conditions Essential

1 April 2021

By David Barwick – FRANKFURT (Econostream) – The pandemic remains a threat to the European Central Bank’s effort to restore price stability, making critical the continued safeguarding of favourable financing conditions, ECB Executive Board member Philip Lane said on Thursday.

In a blog post on the website of the ECB, Lane, who is also chief economist, said that ‘the increase in inflation during 2021 can be best interpreted as the unwinding of disinflationary forces that took hold in 2020 and does not constitute the basis for a sustained shift in inflation dynamics.’

With medium-term inflation prospects still weak, he said, getting to price stability ‘will set the agenda for the Governing Council in the coming years.’

In particular, making sure that financing conditions stay favourable is ‘fundamental’ to generating inflation momentum and shaping expectations, he wrote. Continued fiscal support also remains ‘vitally important’, but needs to be ‘appropriately calibrated’.

The challenge for monetary authorities will not end with a return to the pre-pandemic projected inflation path, he said. ‘Even after the disinflationary pressures caused by the pandemic have been sufficiently offset (with a lead role for the pandemic emergency purchase programme), we will have to ensure that the monetary policy stance delivers the timely and robust convergence to our inflation aim’, he said.

Expectations of developments on euro area job markets are in line with weak inflation dynamics, he said. Extensive fiscal support currently in place makes underlying conditions ‘highly uncertain’, and ‘also points to vulnerabilities ahead’, he said.

Wages should thus stay moderate this year, while pandemic-related inactivity will negatively impact productivity, he said. To get more robust wage dynamics ‘requires a labour market that is sufficiently hot, which will require a reabsorption of a considerable amount of labour market slack’, he argued.

In addition, an uncertain employment outlook and subdued wages would not foster consumer spending, he observed. More generally, while ‘it is reasonable to expect some boost to consumption due to catch-up effects’, he said, ‘it is plausible that households smooth out any additional consumption over time and the pandemic shock may motivate households … to hold some precautionary buffers.’

As well, it is precisely those older and better off, with their lower propensity to consumer, who have fared best financially during the pandemic, he added.

Lane predicted a renewed contraction of Eurozone GDP in 1Q, and spoke of ‘an imprint on activity’ in 2Q from tightened pandemic containment measures. Immunisation efforts would ‘gain traction in the coming weeks’, he said.

The latest U.S. fiscal stimulus would add ‘a meaningful cumulative boost of 0.3 per cent of GDP over the projection horizon’ to euro area output, along with an inflation impact of ‘about 8 basis points in 2023’, he said.