ECB Insight: ECB’s Lane Reinforces Perception of Willingness to Normalise Policy

31 March 2022

By David Barwick – FRANKFURT (Econostream) – After having conceded explicitly on Tuesday that, while no given, a first rate hike in 2022 was at least possible, European Central Bank Executive Board member Philip Lane on Thursday appeared to endorse more generally the gradual normalisation of monetary policy.

In remarks at the Paris School of Economics, Lane said that given the increasing likelihood of medium-term inflation stabilising around 2%, ‘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.’

As was the case Tuesday, Lane’s latest comments represent another concession of ground to financial markets that long ago identified a more urgent need to normalise policy than the ECB’s chief economist and, to be fair, many others in the Eurotower.

Implicitly, Lane had already seemed recently to acknowledge that normalisation was coming. However, his language had not caught up with that recognition. For example, on February 23, Lane said that ‘a normalisation of monetary policy, as we call it’, was one of ‘three possible ways of getting’ to price stability.

And in an interview published only two days ago, all he would say was that ‘there are scenarios where it would be appropriate to start to normalise interest rates later this year’, though in that same interview, he was also suddenly open to the possibility of a rate hike in 2022.

Since then, of course, it has become painfully apparent that the euro area is in for another upside inflation surprise. While monthly and even quarterly readings have historically been steadfastly looked through by the ECB, monetary authorities seem nowadays to be quite concerned with each piece of incoming information.

That was also evident from Lane’s remarks today, in which he complained that improved mid-term price prospects had been ‘overshadowed by the surge in the spot inflation rate’ and warned that ‘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.’

In other words, every additional upside inflation surprise weakens the ECB’s previous confidence in medium-term developments, a confidence that had allowed them to resist tighter monetary policy by pointing to projections two years out. Being relatively dovish, Lane has been at the forefront of that resistance, making the evolution of his views all the more telling.