Exclusive: ECB Insider: Expect Lane to Propose 75bp Hike at Upcoming Council Meeting

17 October 2022

- ECB insider: Need to Adjust Other Instruments; TLTROs Take Precedence over QT
- ECB insider: Recent Developments More in Line with September’s Risk Scenario

By David Barwick – FRANKFURT (Econostream) – European Central Bank Chief Economist Philip Lane is likely to propose a 75-basis-point rate hike at next week’s monetary policy meeting of the Governing Council, according to an ECB insider who spoke to Econostream.

With well over a week to go until euro area monetary policymakers gather, it is clear that such an expectation remains speculative. However, this particular insider, who made no bones about his own intention to support a 75bp move, considered it evident that inflation developments had already left the Council with little choice but to take such a large step for a second time.

As Chief Economist, Lane is responsible for presenting the monetary policy proposal at Governing Council meetings. Traditionally one of the more dovish members of the Council, he nonetheless advocated a 75bp hike at the September monetary policy meeting in the context of repeated upside inflation surprises and concerns about a potential dis-anchoring of inflation expectations.

The insider Econostream spoke to agreed that Lane naturally sought to come up with proposals that, while reasonably consistent with his own less hawkish bent, also reflected the general sentiment of the 24 other Council members, who have grown steadily more hawkish.

In any case, 75bp was not the new standard for ECB rate hikes, and the increments would soon become smaller, perhaps even in December, this person said. Moreover, while dealing with interest rates still had priority, the ECB would have to adjust other instruments as well, with targeted longer-term refinancing operations (TLTROs) taking precedence over quantitative tightening, which needed careful planning, he said.

The (nominally) non-monetary policy meeting earlier this month in Cyprus had laid important groundwork in this regard, he said. However, the current environment called urgently for monetary and fiscal policy to be flanked by structural reform.

Another ECB insider Econostream spoke to expressed complete understanding for the previous person’s assertions, arguing that inflation outcomes were ‘all to the upside’ and that the current situation was in fact more in line with ‘the risk scenario that we had in September’.

Both policymakers argued that monetary policy was not yet restrictive and voiced reluctance to disappoint financial market expectations regarding ECB actions.