ECB Insight: Lane Sees Price Stability Just Over the Horizon, Once High Inflation Fades Away
24 February 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council Philip Lane on Wednesday sounded at pains to meet the hawks part way while implicitly rejecting the more alarmist views about price pressures as he conveyed his main message: that high inflation would ultimately give way to price stability.
In an interview with German daily Frankfurter Allgemeine Zeitung, Lane readily and repeatedly acknowledged that ‘the data clearly suggest that we could be moving closer to our medium-term target’ and recognised that this would imply no further need of asset purchases.
‘It was different in December, when surveys still showed the expectation that we would need to maintain asset purchases until the middle of next year, but the timeline may be shorter than what people expected then’, he said.
That was the new Lane, but the old Lane was still also prominent, assuaging concerns about the potential for out-of-control inflation. Though he studiously avoided the word ‘transient’, the essence of the notion endured.
Many of the upside inflation risks noted at February’s Governing Council meeting ‘related mainly to the short-term outlook’ and were thus ‘not lasting phenomena’, but rather ‘belong to the temporary components of inflation’, he said. What is that if not transient?
And Lane insisted on this point, asserting that in a year and a half if not less, the drivers of currently elevated HICP ‘will play less of a role’. ‘The economy is not in an overheating zone’, he said. ‘We think that most of this inflation will fade away.’
After all, ‘[w]hat we are seeing at the moment is mostly imported inflation, through the prices of oil and gas’, rather than the homegrown variety, he said. Europe was witnessing no ‘general demand boom, just certain catch-up effects related to the pandemic.’
Supply constraints behind much of the latest HICP readings ‘will eventually be resolved’, he said.
As for wages, these would pick up, he said, but that was not necessarily a problem. Reiterating the ECB’s preference for an average annual wage increase of 3%, he suggested that this could indeed be the outcome, given agents, he said, know the central bank would take countermeasures in the event that a wage-price spiral threatened.
Tellingly, Lane abandoned the usual contrast drawn between the respective economies in the US and the Eurozone and instead contrasted the respective monetary authorities directly, implicitly rebuking the hike-and-hike-again faction on this side of the Atlantic.
Given the absence of a serious inflationary threat, ‘we cannot compare the situation of the Federal Reserve to that of the ECB at the moment’, he said. The ECB would go slower, he suggested, as it has defined steps to follow in succession and conditions to meet first.
‘So before we talk about potential rate decisions, we need to end net asset purchases’, he affirmed. ‘And we need to prepare the market for the eventual end of these purchases.’
The ECB didn’t say when the interview was actually conducted, but Lane, who as chief economist presents the macroeconomic analysis and policy options, was probably a bit nonplussed on Wednesday morning to hear via a Swiss paper from Council member Robert Holzmann that the eventual timing of potential rate decisions would in fact be on the agenda already at the upcoming gathering.
When the Council meets in two weeks, Holzmann, who heads the Austrian National Bank, told Swiss daily NZZ, ‘[t]he discussion will certainly include a faster phasing out of all bond purchases and the question of interest rate hikes before the end of the year.’
But then, Lane and Holzmann are at opposite ends of the hawk-dove spectrum. As hawkish as the tone has recently become, we nevertheless tend to side with Lane in doubting that any timetable of rate hikes, even a rough one, will emerge from the Council meeting in two weeks.