ECB’s Lane: One Argument in Support of a 75BP Hike in December No Longer Applicable

21 November 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Chief Economist Philip Lane indicated Monday that one reason for preferring a 75bp rate hike in December was no longer valid.

In an interview with MNI, Lane said that it was ‘usually neither necessary nor wise to try and jump immediately to your target rate.’

‘In December we will make another hike and the scale of it should continue to make progress towards the levels needed’, he said. ‘But it’s not necessary to conceive completing that transition in December. Each meeting is different.’

‘But one platform for considering a very large hike, such as 75 basis points, is no longer there’, he continued. No one thought when interest rates were zero that this was appropriate, and even the current 1.5% is below the required level, he said.

‘But the more you've already done on a cumulative basis, that changes the pros and cons of any given increment’, he said. ‘We will have to look at it in terms of the inflation outlook that we have in December and take into account that we are at a different point now, and also to recognise that there are lags in the transmission process.’

It was obviously so that each rate hike takes the level closer to where it must ultimately arrive, he said. ‘The exact allocation across different meetings is a secondary issue’, he said. ‘But the more we've already done, the less we need to do.’

December was unlikely to see the final rate increase, he said, but it was too soon to hold ‘strong views’ about February and thereafter.

‘The more relevant argument than whether to pause is to move at the appropriate time to smaller increments’, he said. ‘And then, eventually, you get to a point, where, essentially you say: okay, we're at the level where it's probably going to be wise to hold at this level for a while but also signal that we will be open to do more if needed, because we are living under high uncertainty.’

As for the relationship between the hiking cycle and the start of QT, Lane advised not to ‘interconnect the issue so much’, but said ‘decent progress’ in hiking was a prerequisite. ‘And by December, we will have made decent progress on that’, he said.

The Governing Council will come up with ‘a roadmap, general principles’ next month that ‘will subsequently convert into a more precise plan that will allow for the asset purchase programme (APP) portfolio to decline at a certain pace in the coming months.’

‘But I don't think we're going to be on a meeting-by-meeting basis interconnecting the interest rate decision with the pace for the next month or two’, he added. ‘It should be probably more mechanical than that. I think that's a pretty basic principle.’