ECB’s Lane: July’s Revision to Forward Guidance on Rates Was ‘Just The First Step’

19 August 2021

By David Barwick – FRANKFURT (Econostream) – Last month’s revision by the European Central Bank of its forward guidance with respect to interest rates was only the opening act in the implementation of the ECB’s new strategy, Chief Economist Philip Lane said on Thursday.

In a blog post on the website of the ECB, Lane suggested that not only interest rates, but asset purchases and longer-term refinancing operations as well could be relied on further to achieve price stability.

‘The revision to rate forward guidance constitutes just the first step in implementing our new strategy’, he wrote. ‘The monetary policy strategy statement lays out the range of factors that will shape our monetary policy decisions in the coming months and years, with further context provided by the accompanying overview document.’

Lane observed that the ECB’s revised forward guidance stipulated that, in addition to two other conditions, an interest rate hike could only occur after inflation had reached 2% ‘well ahead of the end of our projection horizon’. This was a safeguard against being misled by forecast errors, he said.

Higher interest rates also presupposed inflation being foreseen at 2% ‘durably for the rest of the projection horizon’, he said, and not at 2% merely as ‘the result of short-lived forces that lead to one-time increases in prices that are unlikely to lead to persistently higher year-over-year inflation.’

Thirdly, conditioning a rise in interest rates on underlying inflation ‘provides an extra safeguard against a policy tightening in the face of cost-push shocks that might elevate headline inflation temporarily but fade quickly’, he said.

Along with interest rates, the monetary policy strategy statement ‘also highlights the potential roles of asset purchases and longer-term refinancing operations, as appropriate, in addressing the effective lower bound constraint on policy rates’, he said.

‘We stand ready to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at our 2% target over the medium term’, he added.