ECB Insight: Lane, in an About-Face, Now Open to 2022 Rate Hike

29 March 2022

By David Barwick – FRANKFURT (Econostream) – Far from talking down the possibility of rates lift-off this year, European Central Bank Chief Economist Philip Lane on Tuesday conceded explicitly that while no given, a first hike in 2022 was at least possible.

In an interview with Politico, Lane said he didn’t know whether official borrowing costs would be increased this year, and reiterated the data-dependent nature of the decision.

‘So there are scenarios where it would be appropriate to start to normalise interest rates later this year’, he said. ‘And then, of course, there are scenarios where it could be appropriate to move at a later point.’

Under the circumstances, one can forgive the insistence on being noncommittal. What is important here is the progression; until recently Lane was perfectly willing to be committal, just in the other direction, as he all but ruled out any scenarios consistent with lift-off this year.

On January 7, for example, he said it ‘remains the case’ that it is highly unlikely that interest rates would change in 2022, arguing that ‘we do think inflation is going to come down below our target in 2023 and 2024.’ He reiterated the argument and the conclusion days later.

But the argument would hardly lack all validity now, based on the ECB’s latest HICP projections, which don’t look all that much different for 2023 (2.1%) and 2024 (1.9%) than they did in December (1.8% for both years).

Lane appeared today to defend the current staff forecasts. True, his defence was somewhat half-hearted, but he assured in any case that ‘most of this inflation will fade away’, given that ‘this essentially is an imported inflation shock, it’s a supply shock.’

Under the current conditions of elevated uncertainty, ‘trying to give calendar guidance is not helpful’, he said. ‘The commitment is that our monetary policy responses will ensure that, in the medium term, inflation will stabilise at 2%.’

That commitment hasn’t budged since the strategy review concluded almost a year ago, and elevated uncertainty has been monetary authorities’ constant companion at least since the outbreak of the pandemic two year ago.

We don’t mean to be unkind to Lane, who is hardly the only one to undergo a certain shift in his thinking. The point is that his perception of the likelihood of a rate hike in 2022 has changed, and this is clear.

Lane is among the most dovish members of the Governing Council, which makes his about-face all the more noteworthy. That he continues to suggest that high inflation readings might, rather than lead to second-round effects, trigger ‘a significant downward revision in demand, that on its own terms will imply a downward revision for medium-term inflation’, does not make it less so.