Decline in Core Inflation Could be Misleading Signal, ECB’s Lane Says
9 May 2023
By Xavier D’Arcy – BERLIN (Econostream) – European Central Bank Executive Board member Philip Lane said on Tuesday that he expected core inflation to come down soon, but that this could be a misleading signal.
Speaking at an event hosted by the Hertie School’s Jacques Delors Centre, Lane, the ECB’s chief economist, said that when it came to setting a sufficiently restrictive policy, the duration of time the ECB spent at the peak of its hiking cycle would be a key factor.
He explained that the ECB’s reaction function depended on the path of underlying inflation, but ‘that is not to say that we're just looking at core inflation’, with a number of indicators being analysed.
‘Core is going to come down because of the fading out of energy effects and the fading out of pandemic reopening effects’, he said. ‘But that could be a misleading signal.’
Core inflation contained ‘unusual factors at the moment’, he said.
Regarding the ECB’s commitment to hike rates to ‘levels sufficiently restrictive’ to return inflation to 2%, he said he wanted to ‘emphasise there's two sides to that.’
‘One is that reaching up some level and then keeping rates at restrictive levels for as long as necessary, because there's a duration issue as well.’
At the ECB’s upcoming meetings, the Governing Council would ‘have a range of possible interest rate paths’ due to uncertainty, he said. ‘We will be debating about the terms of risk management factors. Yes, there are upside risks to manage but there are other risks to manage as well.’
In the Eurozone economy, ‘we’re also seeing over a year into our ECB tightening some of what you would expect to see when monetary policy is playing out’, he said.
The economy was experiencing ‘a rebalancing from goods to services’ and a ‘sectoral asymmetry’, he said. There was a ‘rotation away from essentially durable goods […] those types of activities [that are] interest rate sensitive’.
‘We are seeing softness in manufacturing and so on the other hand with the improvement in confidence we are seeing, the services sector robustly continues to recover’, he said.