ECB’s Lane: Not Worth Comparing ECB and Fed Priorities Given ‘So Different’ Situations

17 June 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Thursday played down the significance for the ECB of Wednesday’s unexpectedly hawkish policy guidance from the US Federal Reserve.

Although the pandemic is global, the positions of the US and the euro area are ‘so different’ with respect to the recovery and economic reopening, ‘but also in terms of the wider inflation dynamic’, he said in an interview with Bloomberg. Inflation in Europe is ‘a little bit high right now’, but the 2023 projection is for HICP of just 1.4%, he reminded.

‘And that difference in medium-term outlook really just means we can't spend too much time trying to compare central bank priorities on both sides of the Atlantic’, he said.

European employment of around 15% makes it ‘very difficult … to see very strong wage pressure’, limiting the possibility of second-round effects, he said. Labour markets will need ‘a long time’ to recover completely, implying weak bargaining power on the part of labour and making it ‘very hard to sustain that narrative’ of second-round effects, he elaborated.

The ECB will continue to focus on the medium term, given that monetary policy can do little in the short run and also in view of the passing nature of the ‘dominant sources of high inflation readings’ at the moment, he said.

In light of ongoing upside pressure on nominal yields, the ECB’s decision in March to accelerate the pace of pandemic emergency purchase programme (PEPP) purchases ‘remains a good decision’, he said. ‘It remains the best guidance.’ However, he added, the ECB does not approach the issue of purchase volumes mechanistically ‘in the sense of saying we will do X amount and no more and no less.’

The issue of seasonality in the summer is thus ‘secondary, because we want to to observe and we have the day-by-day flexibility’, he said. The ECB will buy ‘in response to market conditions.’

It remains the case that the PEPP will last throughout the pandemic crisis phase, that its purpose is to return projected inflation to the pre-pandemic path, and that the ECB will buy flexibly to safeguard favourable financing conditions, he said when asked whether the September Council meeting would be the time to discuss tapering.

‘And given that flexible philosophy, given the importance of thinking about the inflation outlook, given the unpredictability of the pandemic, I fully agree with President Lagarde that it's unnecessary and premature to talk about these issues’, he said.

The time to discuss tapering was state-contingent, primarily with respect to the evolution of the pandemic, he said. ‘And so trying to kind of box that into a particular calendar I don't think is very productive’, he said.

With ongoing vaccination progress, ‘there will be a time when it's no longer premature and unnecessary to talk about it’, he conceded. That might not be September, however, he hinted.

‘We're not necessarily going to have every piece of hard data you want to have going into the September meeting’, he said. ‘So you know September is of course going to be an important meeting, but there's going to be a lot of data coming in throughout the autumn.’

Prompted to confirm that PEPP purchases would thus remain elevated until the end of the year, Lane said he would repeat that ‘this all depends on what's happening to the pandemic itself.’

Inflation prospects are still ‘quite subdued’, he said. ‘Of course it's a multi-year challenge for us having accommodative monetary policy to bring inflation up towards where we want it to be. It's not a situation which is going to end very quickly. So so we do have a sustained campaign ahead of us.’