ECB Insight: ECB Sets Its Own Traps, Then Falls into One and Flounders

17 September, 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank has essentially stumbled headlong into a pitfall of its own making after information regarding the institution’s expectations of future inflation was apparently shared by Chief Economist Philip Lane with private bankers.

According to the Financial Times on Thursday, Lane earlier this week revealed on a call with representatives of German banks that the ECB’s longer-term inflation outlook suggested the achievement of price stability by 2025, which would effectively open the door to a rate hike in little more than two years, significantly earlier than generally expected.

An ECB spokesperson asserted that: ‘The FT story is not accurate. Mr Lane didn’t say in any conversation with analysts that the euro area will reach 2 % inflation soon after the end of the ECB’s projection horizon. The conclusion by the FT that a lift-off of interest rates could come already in 2023 is not consistent with our forward guidance. Mr Lane made clear in a public event on Wednesday that by being persistent with a high level of monetary stimulus, the ECB can reach its 2% target over time, without mentioning a specific date.’

It may be that some aspect of the FT story is not accurate, but the opening salvo of the ECB’s response is nonetheless devoid of real informational value. What exactly is not accurate? More important is the second sentence. Here however the ECB chooses to situate its denial in a suspiciously precise context (‘any conversation with analysts’).

Conspicuous by virtue of its absence is the denial that one would expect if there were really only smoke and no fire; specifically, the ECB says neither that Lane did not make the comment attributed to him during the call in question, nor that Lane never made the comment at all. Indeed, the ECB doesn’t even dispute the question of whether the ECB feels that ‘the euro area will reach 2 % inflation soon after the end of the ECB’s projection horizon’.

Moreover, where it suits the ECB, vagueness is evidently preferred (‘soon after the end of the ECB’s projection horizon’). A more convincing refutation would have confronted the FT’s comparatively precise wording (‘by 2025’) head-on.

The ECB then proceeds to dispute the consistency of the FT’s inference - namely that a first interest rate hike could occur ‘already in 2023’ - with the central bank’s forward guidance. It is worth noting that the FT expressed itself a touch more cautiously than implied by the ECB, writing namely just that ‘[i]f the internal scenario disclosed by Lane this week is accurate, it means that the ECB could meet the conditions to start raising rates by the end of 2023.’

But what the ECB’s forward guidance says now is no unconditional promise, but rather is always subject to being revisited if the relevant facts change, as various monetary policymakers have pointed out. A rebuttal of the FT’s reporting cannot be predicated on the implicit assumption that current forward guidance will apply unchanged in more than two years’ time.

Finally, the ECB notes what Lane said during a public event on Wednesday. Superficially relevant, this is more of a red herring than anything else. The fact that Lane said one thing during a public event on Wednesday hardly means he could not have said something else, or something more, on a private call with German bankers earlier in the week.

In the end, the ECB has no one to thank but itself for its latest misstep. As has been suggested here before, the ECB has been less than realistic about the actual inflation outlook, insisting instead on being able to justify unduly dovish policy and only within the last few weeks finally coming around to the realisation that ‘harder, better, faster, stronger’ may make for a good soundbite but, as a policy prescription, has ceased to be appropriate.

Closely associated with this is the ECB’s failure to be forthcoming. Were the inflation analysis at the heart of the FT’s story made public rather than kept secret, the ECB might have spared itself the latest contretemps. But of course, the problem here is the conflict between a no-holds-barred assessment of the outlook and the desire to maintain a stubbornly dovish façade.

That the ECB elected to cast aside its furtiveness for the exclusive benefit of private banks is, unfortunately, no more than a regularly recurring scandal at the institution and a topic distinct from the inflation outlook. With respect to the latter, we suspect the ECB’s decidedly feeble reaction to the FT’s reporting speaks volumes.