ECB’s Lane: For Inflation, Wages Must Pick up ‘Quite a Bit’, But Wage Data Not Indicating This

11 January 2022

By David Barwick – FRANKFURT (Econostream) – Euro area wage data are so far not showing the pick-up of wage growth needed to support underlying inflation enough for the European Central Bank to hike rates, ECB Executive Board member Philip Lane said Tuesday.

In an interview with Italian national business daily Il Sole 24 Ore, Lane reiterated the standard policy withdrawal sequencing and said that the ECB would not even consider reducing its balance sheet until well past the lift-off of interest rates.

Repeating the assertion that the conditions for a rate hike were ‘quite unlikely’ to be fulfilled in 2022, Lane noted the requirement that underlying inflation progress have first progressed sufficiently and said that the pandemic made the relevant assessment more difficult.

The ‘central element’ of underlying inflation was wage trends, he said. ‘Energy moves are abrupt, energy can go up and down in a volatile way’, he said. ‘But a significant move in the persistent and underlying source of inflation is unlikely unless you see wages picking up quite a bit. Until now, the wage data do not indicate any major acceleration in underlying inflation.’

When banks replace with market funding the money lent them via the ECB’s targeted longer-term refinancing operations (TLTROs) was up to them, Lane said.

‘As for the ECB balance sheet, there is a clear sequence: net purchases stop before the first interest rate increase, and only well after the first increase in interest rates will the central bank think about shrinking its balance sheet’, he continued.

The ECB being further away than others from an interest rate hike, ‘the debate on when to start shrinking our balance sheet is also further away; the shrinkage of our balance sheet is much more a topic for the future than for today’, he said.

Lane expressed confidence in the growth outlook, suggesting that bottlenecks would simply defer rather than lastingly reduce production and observing that order books were well filled.

‘Overall, in Europe we see a solid growth engine this year, next year and the year after that’, he said. ‘This applies also to Italy.’

The ECB would use pandemic emergency purchase programme (PEPP) reinvestments to deal with fragmentation risk, he said.

Exchange rate developments had to be seen in the context of the pandemic, he said. ‘Compared to pre-pandemic levels, we had an initial appreciation of the euro, and now a depreciation’, he said. ‘It is not a major element. I would not overly focus on the exchange rate.’

As in his interview last Friday, Lane stressed the significance of how economic agents react to elevated inflation: ‘The key issue for us as the central bank is: do we see changes in household and firm decisions? Do we see changes in wage behaviour? But we do not see behaviour that would suggest inflation will remain above our target into the medium term.’