ECB Insight: If Not Quite Relaxed, Lane Sounds at Least Guardedly Optimistic About Inflation

5 September 2023

By David Barwick – FRANKFURT (Econostream) – We suspect that Irish online news outlet The Currency tried to draw European Central Bank Executive Board member Philip Lane out more explicitly on the matter of what the ECB Governing Council might decide at its monetary policy meeting next week.

If so, Lane was having none of it, but then, such is the cost of interviewing the ECB’s chief economist when the ECB is well and truly adhering to a data-dependent, meeting-by-meeting approach to policy.

But that is not to say that Lane’s extensive comments on inflation published today failed to offer any insights into the state of mind of the official who will present the ECB’s policy recommendation to the assembled Council.

We think the phrase ‘guarded optimism’ about price stability prospects might, if anything, marginally understate his frame of mind one week after Eurostat showed euro area headline inflation to have persisted at 5.3% in August, higher than most expected.

The data were not without a silver lining, Lane observed, given ‘some easing in the elements of core inflation’, he said. ‘So goods inflation and services inflation came down, which is very welcome.’

A month does not a trend make, so policymakers ‘need to see that continue’, he said. A caveat, that? Not really, as he promptly reassured that the price hikes of a year ago would ‘fall out of the data this autumn’, so that ‘we do expect to see this famous core inflation come down throughout the autumn.’

Yes, food and energy prices would vacillate, and a headline figure of 5.3% was in any case still high, but the essence of the story, he said, is that ‘in terms of looking for signals of momentum and signals of directional change, I would underline the fact that there has been some easing in goods inflation and services inflation, which is a welcome development.’

Headline inflation had ‘already halved from 10[%] to 5[%], with further progress expected this year’, he underscored.

None of this has to mean that Lane couldn’t be open to another interest rate hike, but a state of alarm about inflation would look and sound rather different.

That was largely the tone of the rest of the interview, in which he debunked the idea that summer tourism would support rampant services inflation and affirmed that the profit component of inflation would weaken in the current and subsequent years.

‘That environment, which was so supportive of price increases, we don’t think it’s there and we think it’s going to get even more restrictive over time’, he said in this context.

And although oil and gas prices had strengthened lately, some of the responsible factors for this ‘may dissipate’, he said.

Second-round inflation effects would peak this year, and wage developments, albeit currently ‘significant’, were, ‘crucially, on a declining path’, he elaborated.

At this point, Lane made the lone argument that could be interpreted as favouring further monetary tightening.

‘The policy challenge is to contain it, to make sure that the second round is contained and does not become embedded’, he said.

Even if one chose not to understand the comment to be of a general nature, it does not necessarily indicate a belief on Lane’s part that another rate hike is needed. After all, the ECB could also see itself meeting the policy challenge he defined simply by maintaining official borrowing costs in restrictive territory.

And even if Lane is already reasonably certain that his own preference now is indeed to concentrate on duration rather than level, a little strategic ambiguity may be useful if the ECB wants to reserve both policy options until the moment of truth on Thursday of next week.

In previous reviews of where the Governing Council members stand individually on what to do in September, we had no problem classifying Lane among those leaning towards a pause.

Our reading of his latest intervention is that this assessment was justified, which however does not mean that if he senses the wind is blowing in another direction, or if the staff macroeconomic forecasts surprise in the wrong direction, he would not adjust and propose another 25bp hike.

Still, with this interview potentially the last significant public commentary by an Executive Board member on monetary policy before the quiet period begins, we are inclined to think that if the ECB chief economist currently saw a higher chance of a rate hike emerging from the Council meeting, then adopting a somewhat more nuanced tone today would have made more sense.