ECB’s Lane: Evidence All Points to 2023 and 2024 HICP Likelier Below Target
7 January 2022
By David Barwick – FRANKFURT (Econostream) – All available evidence supports the European Central Bank’s view that inflation next year and the year after is more likely to undershoot the ECB’s price stability target, Executive Board member Philip Lane said Friday.
In an interview with Irish national broadcaster RTÉ, Lane said that despite the expectation that inflation would subside after overshooting target this year, so that an interest rate hike in 2022 remained improbable, the ECB would keep a close watch on incoming data and in particular on the possible emergence of second-round effects on wages.
Asked how long inflation would need to be moderately above target, Lane said that the ‘criterion’ was: ‘are we seeing inflation, persistent inflation, being converted into actions, into new types of wage-setting behaviour, price-setting behaviour?’
There is no evidence that it is not understood that high inflation is temporary, he said. ‘What we see is not just our own forecast, but the behaviour of consumers, the behaviour of firms, the financial markets’, he said. ‘All agree with us in the sense of believing that, more likely than not, inflation in 2023, 2024 will be below our target, not above our target.’
It ‘remains the case’ that an interest rate hike this year is very unlikely, he confirmed in this context. '[W]hen we think the high inflation is not going to be durable, the case for altering our interest rate policy is not there’, he said.
However, he immediately added, new data will be ‘coming in all year long’ and watched closely with respect to current developments as well as to structural shifts that might change the inflation outlook.
This included in particular ‘what’s happening in terms of wage behaviour’, he said. Some pick-up of wages is expected, he said. ‘And if we have a stronger labour market in the coming years, then we should have stronger wage behaviours than before the pandemic. So, to some extent, that’s going to be what we want. But of course, we have to keep an eye out on whether wages will move beyond that and move into the kind of second-round effect, which would be something of a concern.’
‘We will have new forecasts in March, in June, in September’, he observed. ‘So as the new data come in, whether it comes in stronger, exactly on track or weaker than we expected, the ECB will always be responding because we have a new strategy. … anything that threatens inflation above 2% over the medium term we will be responding to. Equally, any force that threatens to push inflation below 2% we will also respond to.’
High December euro area HICP was ‘broadly in line with what we expected’, he said, invoking the predicted ‘peak of inflation at the end of 2021.’ As for the possibility of more persistently high inflation, monetary authorities ‘always … recognise there are risks on both sides’, he said.
‘So of course, there is a lot of attention to be paid to the scenario of inflation being above our forecast’, he said. ‘And we will be monitoring the situation, and I think I've repeatedly said actually that the most important element of what we need to look at is what’s going to happen to wage behaviour over the course of this year.’
The ECB will also watch energy prices closely, these being ‘a very prominent index’ in terms of upside and downside risks, he said. ‘We’ve just had that discussion, that there are forces on either side in relation to energy inflation.’