ECB Insight: Lane Confirms Key Specifics of Coming Monetary Policy Normalisation Steps

30 May 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Chief Economist Philip Lane in an interview published Monday confirmed the key messages of President Christine Lagarde’s blog a week ago today, presumably putting to rest the scepticism of at least one Governing Council member as to whether the ECB would really deliver the end of net asset purchases in the coming weeks and – probably - a deposit rate of zero percent by the end of the summer.

Those who’d had less doubts on those particular scores should still have gotten plenty out of Spanish business daily Cinco Días’ interview with Lane, who à la Lagarde called it ‘too early to know what will happen after [September], as it will depend on how the economy evolves.’

Not surprisingly, Lane, the last member of the Executive Board to categorically rule out any rate hikes in 2022, showed no enthusiasm for steps of more than 25 basis points, describing this as ‘a benchmark pace’ for the July and September moves.

‘Any discussion about other moves would have to make the case for moving more strongly than this sequence of hikes in July and September’, he said. ‘The discussion will be had, but our current assessment of the situation, where we think the medium-term inflation outlook is in line with our 2% target, calls for a gradual approach to normalisation.’

This is no less or more than anyone should have expected. That the Council would need to discuss the possibility of a 50-bp move has been known since Econostream reported it on April 21. We noted then and have repeated since that it was not and may never become the baseline. This is still so, even though several Council members have since expressed their support for the idea.

Still, if anything, the fact that such a dyed-in-the-wool monetary policy dove as Lane musters such feeble resistance to 50 basis points would seem to raise the stakes for such an outcome a bit, though we don’t want to discount the possibility that his general view of things has been invalidated over the last year or so to the extent that he is now simply reluctant to position himself with his previous outspokenness.

In our view, Lane was not keen on shedding much light on the state of medium-term inflation. We note that he referred to the European Commission’ forecasts, which were released two weeks ago and now call for euro area HICP of 2.7% in 2023, up from a mere 1.7% three months earlier, but do not extend beyond that.

Econostream understands that at least one of the large Eurozone member states, whose national central banks play a larger role in the June and December projection exercise, has already come up with a figure for domestic 2024 HICP representing an increase from the previous round.

Any increase at the level of the euro area would be pregnant with meaning, given the March estimate for 2024 HICP came in at 1.9%. Of course, this is widely considered by Council members to be essentially the same as 2% anyway, but still, a two in front of the decimal point at the horizon would fuel the debate about the proper speed of normalisation.

Quite possibly, Lane, whose team has so far managed to avoid such an outcome, is now resigned to it. That would certainly make his reticence on the topic easy to understand. We don’t completely buy his assertion that casting things in terms of the ECB’s own adverse scenario of the last projection round is not ‘the way to look at it.’

Lane also preferred not to get bogged down in a discussion of the euro area’s neutral rate of interest. ‘Rates will settle down when inflation settles around 2%, and we should be open-minded where that will be’, he said. ‘We’re going meeting by meeting, quarter by quarter.’

Lagarde, he reminded, had expressed a willingness to adapt the speed of normalisation up or down as appropriate. ‘So that’s our focus, not the academic debate on where the so-called neutral interest rate is’, he said.

It was only natural for a Spanish medium to inquire about the prospect for an anti-fragmentation tool. Lane’s answer in every respect corroborated our report last week. The ECB is determined to prevent fragmentation risk from materialising, but there is no ‘fixed number at which point we would intervene’, he said.

‘Flexibility is a general concept’, he said. ‘One application is through the PEPP reinvestments, but there are also other instruments that could be used.’ Here the asset purchase programme, which Econostream said may be endowed with similar flexibility, comes to mind.

But a permanent tool is clearly not in the offing, just as we indicated. ‘The debate about what type of instrument could be used is a secondary one – the bottom line is the commitment that we will not let unwarranted impairment of the transmission mechanism interfere with monetary policy and our ability to deliver our target’, Lane said.