ECB Insight: Lane Back at Work Setting the Monetary Policy Record Straight for the Doubters
23 May 2023
By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Tuesday said that Europe was now in part two of the current inflation story and that monetary policy should be forward-looking, maybe.
In a meandering podcast done, one might suppose, for reasons known mainly to him on a website not previously conspicuous for any interest in the ECB, Lane said that ‘both the US and in Europe now are very definitely in this second round’, in which ‘it's not so much that inflation can be viewed as a shock’, but rather, characterised by the efforts of workers ‘to raise wages to compensate for the loss of living standards’ and of firms to ‘protect their profitability.’
‘And this is why monetary policy in Europe is now, over the last year, has raised interest rates quite a bit’, he said. ‘For the same reason the Fed has raised. No matter what the origin of inflation is, to get inflation back down in a timely manner does need a significant monetary policy response, which is what we've been doing.’
That was more or less the extent of insights into current ECB monetary policy, though we don’t wish to ignore another remark by Lane, namely that ‘monetary policy has to be forward-looking.’
‘If we raise interest rates, the interest rates increases we've made will affect the economy for the years to come’, he said in this context. ‘The peak of these effects are only now working their way through the pipelines of the European economy.’
The observation that the best monetary policy is anticipatory is a bit ironic, given that elsewhere in the podcast, its author appeared to argue precisely against being too forward-looking, But then, the latter case was when Lane was asked whether the ECB had been unduly slow in reacting to mounting price pressures.
Lane had ‘two views on that’, one of them being that ‘with the benefit of hindsight, I think it's fair to say in terms of the philosophy, we definitely had a philosophy of we should wait until we're pretty sure that this inflation shock is going to be persistent and substantial, before having a full-scale monetary response.'
We are not sure whether it should take the benefit of hindsight for the ECB’s chief economist to know what his institution’s fundamental approach to monetary policymaking was, but it is at least semi-clear that Lane stopped short of categorically excluding all doubt as to the Eurotower’s responsiveness.
Which, however, doesn’t mean he was ready to explicitly acknowledge any such doubts, either.
‘I think any future review will probably look again at the balance between being preemptive and being, if you like, patient or persistent before responding’, was all he said.
And even that he then watered down with his second view on the question of whether the ECB needed to move faster, one we’ve heard before.
‘But I think the larger point is the medium term focus we have meant that, or means that, essentially even with a response that was cautious and gradual in its initial stages, a lot can be achieved by essentially then moving with determination once you start to move’, he said.
‘So, in other words, at the time, the pros and cons were, OK, should we move early, but at the risk of overreacting, what at the time could have turned out to be a temporary inflation shock?’ he continued. ‘Or should we wait, but recognizing if we do wait, then once we move, we will have to move with conviction.’
The listener might be excused for finding that a bit rich, given this chief economist’s unique role in deferring the policy reaction. In particular, Lane, as we’ve previously noted, was ‘the last member of the Executive Board to categorically rule out any rate hikes in 2022’, and rather than ‘move with conviction’, was known until well into the tightening cycle for his go-slow preferences.
‘I think people who simulate alternative histories of the last couple of years would not find at a macro level that being one or two quarters delay in raising rates would make a massive difference to the inflation rate or to the overall outcome’, he said. ‘So, I do think in our macro models, delays of one or two meetings, one or two quarters do not make a massive difference.’
Yes, this is the same interview in which Lane argued that ‘monetary policy has to be forward-looking.’
Of course, the definition is everything here, and one discovers Lane’s frame of reference as he contrasts the ECB’s policy reaction in 2022 with that of the Fed nearly half a century ago, an exercise that yields a convenient conclusion.
‘It was not a question of being late by three months or six months’ back then, he said. ‘It was basically underreacting on a persistent basis over several years. And that's not the scenario we have.’
Lane only had to field softballs from the interviewer, whose next remark, though an observation rather than a question, nonetheless elicited from Lane the slightest of concessions.
‘Of course, given the scale of the inflation we've seen, given the fact we did have, I think, an expressed philosophy of being patient, if you like, before we would raise interest rates after many years of being close to the lower bound, it's reasonable for others and for ourselves to ask questions, to do self-reviews’, he said. ‘I would differentiate between, if you like, a casual “Monday morning quarterbacking” versus the fact that everyone should learn and review from these episodes.’
So, to be clear, the ECB merely acted in line with its wait-until-the-last-minute-and-then-run-like-hell reaction function, but if someone really still feels the need to ask a question...
We observe that the we-always-knew-we-could-catch-up argument Lane belaboured is not new; indeed, he used the expression explicitly in defending his record in an interview with the Financial Times four months ago.
In other remarks worthy of note in today’s podcast, Lane asserted against plenty of evidence to the contrary that ‘all of the Governing Council members are there as Europeans’ and that ‘[y]ou leave your nationality at the door’ of the ECB.