ECB Could Keep Rates Restrictive ‘For Quite a Long-Lasting Period’, Lane Says

28 February 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane said on Tuesday that interest rates could remain in restrictive territory for a protracted period.

In an interview with Reuters, Lane, who is the ECB’s chief economist, said that there were signs that rate hikes were starting to have an impact on inflation in the euro area.

The ECB could keep rates in restrictive territory – which he said the market saw as being above 2% - for ‘quite a long-lasting period, a fair number of quarters, but not forever.’

There was ‘significant evidence that monetary policy is kicking in’, he said.

‘For energy, food and goods, there’s a lot of forward-looking indicators saying that inflation pressures in all of those categories should come down quite a bit', he said, citing a reversal of price pressures at the wholesale and intermediate levels.

Although prices at the retail level were still 'very strong', the intermediate level reliably predicted future price pressures, he said.

'The fact that these are turning around, including through the easing of bottlenecks and global factors, suggest that there will be significant reductions in inflation rates for energy, food and goods', he said.

Core inflation was not a sufficient indicator of whether price pressures were going to subside, he argued. ‘Looking at core inflation as an aggregate is not super helpful’, he said, ‘I think we need to look at the dynamics of goods inflation and services inflation in a more granular way.’

The Governing Council were ‘all signed up to the criterion that sufficient progress in underlying inflation is important’ in order to stop tightening, he said. Policymakers should have a ‘strong focus on underlying inflation dynamics, which is not the same concept as core inflation.’

Falling core inflation would not be enough for the ECB to change its policy stance, he argued: ‘If we settle into our durable plateau of interest rates, it will not be the case that in the first month of a significant fall in core inflation we would need to immediately start revising our plan.’

‘Staying the course has two components’, he said. ‘One is to bring rates to the levels that are needed’, and then rate cuts should not start ‘until we have a high degree of confidence that the target is secure.’

He reiterated that the ECB would be very careful not to cut rates too quickly or too early: ‘I absolutely sign up to the monetary policy philosophy that wherever we get to, we should be slow to come down until we have very strong evidence … that we are returning inflation to target’, he said.

Regarding the ECB’s decision at its upcoming meeting, Lane said ‘the data flow since then suggests that the assessment is solid, that we need another 50bp in March.’

With regards to the inflation outlook, ‘the risk remains skewed to the upside', he said.

There were ‘plausible scenarios for inflation that doesn’t come back to 2% quickly enough’, he said, such as inflation expectations de-anchoring or a wage-price spiral.