ECB’s Lane: Can Gradually Take Monetary Policy Towards More Neutral Stance
31 March 2022
By David Barwick – PARIS (Econostream) – The European Central Bank’s monetary policy can be gradually normalised so as to reach a more neutral policy stance, Executive Board member Philip Lane said Thursday.
In remarks at the Paris School of Economics, Lane said the Council considered it ‘increasingly likely that inflation will stabilise at our 2% target over the medium term’, meaning that ‘the degree of monetary policy stimulus put in place to address the pre-pandemic challenge of persistent below-target inflation can be normalised in a gradual fashion towards a more neutral setting.’
Lane repeated the ECB’s willingness to terminate or expand net asset purchase programme (APP) purchases in 3Q, as well as the assertion that the ECB’s newly worded forward guidance on interest rates ‘gives some extra space to test the conditions after we stop purchasing bonds and before we take the next step towards normalisation.’
‘The expression “some time” also conveys that, especially in an uncertain environment, the time interval between the end of net asset purchases and lift-off is not predetermined but will depend on the timeline for the fulfilment of our rate forward guidance criteria and the appropriate incorporation of prevailing economic, financial and market conditions in our interest rate decisions’, he continued.
The signal that any rate hikes would be gradual was ‘especially important in times of uncertainty’, he said. It was also ‘especially important to remain data-dependent and for optionality to be two-sided’, he said.
Lane highlighted the ECB’s flexibility in the context of the pandemic emergency purchase programme (PEPP), reinvestments under which ‘can be adjusted flexibly across time, asset classes and jurisdictions at any time.’
‘This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic’, he said.
Moreover, net PEPP purchases could be restarted in the event of pandemic-related shocks, he said.
Higher spot inflation readings lately have ‘overshadowed’ an improved medium-term outlook, but are due to factors that ‘conditional on the appropriate conduct of monetary policy, should not be a source of persistent inflation’, he said.
Risen external prices have constituted a negative shock to the euro area that ‘will warrant close monitoring in the coming quarters’, he said.
The view that inflation would ultimately stabilise around the ECB’s price stability target is supported by the ‘considerable revision in inflation expectations over the last year’, though ‘complacency should be avoided’, he said.
‘In particular, the current prolonged phase of spot inflation rates far above the target might lead some types of economic actors to make further upward revisions to their near-term and medium-term inflation expectations’, he elaborated.
This is why the ECB needs to closely watch a range of indicators of expectations, he said.