ECB’s Lane: Least Likely Scenario Is Where Inflation Persists Well Above 2%

25 January 2022

By David Barwick – FRANKFURT (Econostream) – That euro area inflation would stubbornly remain at levels well above 2% is the least likely scenario of the three most likely hypothetical scenarios, European Central Bank Executive Board member Philip Lane said Tuesday.

In an interview with Lithuanian business weekly Verslo žinios, Lane said that one scenario involved a return to very weak inflation, while in a second scenario, ‘inflation will stabilise at 2%’, requiring monetary policy normalisation ‘over time’.

In the third scenario, ‘where inflation is significantly above 2% on a persistent basis, then that will call for a monetary policy tightening’, he said. ‘We would have to respond.’

The latest staff projections see inflation subsiding to below 2%, but ‘it's also possible that we may enter a world where inflation stabilises around 2%’, he said. ‘I find it less likely to think about a scenario where inflation is persistently, significantly above 2%, which would require a serious tightening. That scenario, would, I think, in the context of the euro area, be less likely than the other two scenarios.’

Lane described the impact from the Omicron variant of the coronavirus as being ‘only for a few weeks’ and thus not ‘a factor that will influence the activity levels for the year’. Concern about it was therefore less than in December, he said.

‘I think in overall terms the sense is that, between the public health measures and other measures, it's turning out that we can hope that the euro area can recover quite well from the pandemic’, he said.

The ECB is willing to ‘adjust all of our policies − whether that's asset purchases, the targeted lending programme, our interest rates’ for the sake of price stability, he said. ‘And if we saw the data coming in to suggest that inflation would be too high relative to 2%, then of course we would respond.’

The policy withdrawal sequencing is also clear, he said, and envisions an end to net asset purchases first and only then the possibility of interest rate hikes.

The ECB is closely looking at the pass-through of more expensive energy, he said. ‘So far, we do not see a big response of wages’, he said. ‘We do expect a response of wages but what is critical is how big.’ Average annual wage growth of 3% would be appropriate for price stability, he indicated. ‘We are not, right now, seeing wage increases in that zone’, he said. ‘But of course, we will continue to look at this throughout the year.’