ECB Insight: Lane Got it ‘Fundamentally’ Right, Or So He Says

17 January 2023

By David Barwick – FRANKFURT (Econostream) – How satisfying to look back at an extraordinarily challenging time and be able to confirm that even a pea soup fog of uncertainty didn’t prevent one from acting unerringly. That’s the fortuitous position European Central Bank Executive Board member Philip Lane appears to be in, based on his interview Tuesday with the Financial Times.

Asked whether he was comfortable now with the decisions he made over the last couple of years, Lane replied, ‘Fundamentally, yes.’ That ‘fundamentally’ is doing some heavy lifting indeed.

By coincidence, the interview is but eight days away from the one-year anniversary of another Lane interview, namely that published in Lithuanian business weekly Verslo žinios last January 25.

Possibly the latter interview has been on the ECB Chief Economist’s mind recently. Both then and now, he spoke of ‘three scenarios’ (last January) or ‘three regimes’ (this January): one of a return to lowflation, a middle one in which inflation stabilises at 2%, and a third in which inflation persists significantly above the ECB’s target.

‘I find it less likely to think about a scenario where inflation is persistently, significantly above 2%, which would require a serious tightening’, he said a year ago. ‘That scenario, would, I think, in the context of the euro area, be less likely than the other two scenarios.’

That didn’t age so well, even if it was a tad more cautious than an utterance of his two weeks previously in yet another interview where he told Italian national business daily Il Sole 24 Ore that ‘[t]he data we have make it quite unlikely that the criteria we set to raise interest rates will be fulfilled this year.’

Lane’s defenders might argue that there was no knowing at the time of last January’s interviews that fascist Russia would invade Ukraine one month on. In fact, Lane was asked explicitly by the Lithuanian newspaper about ‘the deteriorating geopolitical situation in Ukraine these days due to the possible Russian military offensive’ - the question that generated the shortest answer of the interview.

Even if one is willing to grant Lane the impossibility of knowing a year ago where things were headed – tantamount to calling it mere happenstance that various colleagues of his did get it consistently right – it is certainly convenient that in the end, according to Lane in the FT, whether the ECB risked falling behind the curve doesn’t even matter.

‘The debate about the exact timing is misplaced, because we knew that we could always catch up if it turned out that rates needed to be moved more quickly’, he said. ‘In the end, where we are now is reasonable.’

The irony here is that Lane has been known above all for resisting the shift from extremely accommodative monetary policy to what he calls the ECB’s currently ‘reasonable’ position.

This aspect goes unmentioned, but Lane doubles down on the idea that it’s not when the journey starts but rather how fast you drive: ‘Any debate about whether we moved too slowly on rates has to be assessed in the context of being willing to move at a fair pace once we started hiking’, he said.

Perhaps the greatest irony of this interview so not short of irony is the following: ‘If you asked your readers a year ago what probability they would put on the ECB’s being at a 2% policy rate by the end of 2022, I don’t think many would have bet on that.’

Strictly speaking, Lane is correct. But an appropriate question might be precisely why hardly anyone could have imagined such an outcome. Any reasonable answer would have to include the fact that the ECB’s own chief economist was busy sparing no effort to dissuade observers from such a view.

Seen in that context, Lane’s next sentence could be considered a wee bit galling. ‘So, we’ve proven we are responsive and we’ve also proven our determination to deliver our inflation target’, he said.

A little more humility would not be completely out of place.