ECB’s Lane: Favourable Financing Conditions Essential to Restoring Inflation

7 April, 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank must continue to safeguard financing conditions so that inflation can return, ECB Executive Board member Philip Lane said on Wednesday.

In an opinion piece published in German business daily Handelsblatt, Lane, who is also chief economist, wrote that while favourable financing conditions are ‘essential’ to restoring inflation, ‘it is also crucial that fiscal support is maintained.’

‘Even after the disinflationary pressures caused by the pandemic have been sufficiently offset, we will need to ensure that the monetary policy stance ensures a timely and significant convergence towards our inflation target’, he wrote. ‘Our current review of the monetary policy strategy will make its timely contribution to meeting this challenge.’

Ongoing inflation volatility ‘can be attributed to a variety of temporary factors, all of which are unlikely to have an impact on medium-term inflation dynamics.’

Those factors, he wrote, include energy prices (‘strongly fuelled’ by the German tax on CO2 emissions), pandemic-related shifts in consumer spending (favouring sectors more strongly represented since January in the HICP basket of goods), the reversal of some countries’ reduction in the VAT, and changed seasonal clearance sales.

‘Notwithstanding these short-term swings, projected medium-term upward price pressures remain subdued’, he said. ‘This is due to the persistent weakness in demand and considerable underutilisation in the labour market and goods markets.’

ECB staff forecasts calling for HICP of 1.2% next year and 1.4% in 2023 assume a gradual reduction of the slack on job and product markets, he said. However, ‘the employment outlook remains very uncertain’, with wages ‘likely to remain subdued in 2021’, he said.

Meanwhile, although pent-up demand would probably give ‘some impetus to consumer spending’, Lane called into question the strength and durability of such an effect. And while investment could benefit from firms’ improved outlook, balance sheets are weakened in some sectors and uncertainty is still elevated, he said.

US stimulus plans are a positive factor, but ‘the impact on output and inflation in the euro area is likely to be limited’, he wrote, citing ‘relatively weak trade linkages’.