ECB’s Lane Leaves December Rate Hike Open, Warns of Second Inflation Wave, Downplays QT

6 December 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Chief Economist Philip Lane on Tuesday left open the question of whether the ECB Governing Council would hike rates by 75bp or 50bp in December, but warned of a second inflationary wave.

In an interview with Italian business newspaper Milano Finanza, Lane took issue with the characterisation of his comments some two weeks ago as having been an assertion of a lack of arguments favouring a large rate step this month.

‘What I said last week, and I will also say to you now, is that when we had very low interest rates, a move of 75bp was reasonably straightforward’, he said. ‘So that made sense in September and in October.’

‘We will see in December what the correct decision will be’, he continued. ‘But the starting point is different now. We’ve already hiked rates by 200bp. We will still be guided by the inflation outlook. But we cannot decide on the appropriate size of the increase in any one meeting without considering the starting point. And the starting point is now a lot higher than where we were in previous meetings.’

That was ‘one dimension of the debate, but of course in terms of the wider debate we will have to look at the overall outlook’, he said.

Lane presented reasons to think inflation would approach the ECB’s target, including the monetary tightening implemented thus far and still to come as well as the uniqueness of the current energy crisis.

‘But let me also say, we do think there will be a second round of inflation’, he said, pointing to the need of companies to recover risen costs and the likelihood of stronger wage growth that ‘will support spending and also raise prices.’

‘That is why it will take some time to return to our 2% target’, he said. ‘So the second round effects will drive inflation next year and in 2024.’

A recession, if there is one, would be ‘relatively mild and relatively short-lived’, he said. ‘If it is a recession of maybe six months and a mild one, then the reduction in aggregate demand in that case would be smaller’, meaning that ‘the anti-inflation impact will be relatively limited.’

Quantitative tightening would be a ‘two-step process’ in which the principles were defined before the timeline, he said.

‘But I think that by now there is a universal consensus that is not specific to the ECB, that QT should essentially be a background programme’, he said. ‘We would make sure that it makes its contribution to monetary policy normalisation in a way that reinforces the primary instrument, which is setting rates. Our main focus will be setting the policy rate, and QT will be operating in the background, in a predictable, measured way.’