ECB’s Lane: ‘Totally Open in Adjusting Our Policy Over the Next Year or Two’

22 September 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Friday said that the ECB was completely willing to modify its monetary policy stance in line with new information.

In an interview with Yahoo Finance, Lane said that increasing economic slack ‘will make sure that over the next year or two, price increases and the underlying cost increases such as wages will remain fairly contained.’

Still, he qualified this, ‘the overriding message … is high uncertainty’. The ECB thus believes that interest rates of 4% following last week’s hike will make a large contribution to restoring price stability, he said, ‘but also we’re loud and clear saying that number one, this rate has to be held for long enough to make sure inflation is firmly on its way back to 2%.’

‘And then second, we’re totally open in adjusting our policy over the next year or two as we see the incoming data’, he said.

Not only over the coming quarter, but also ‘well into next year’ there would be a lot of incoming data monetary authorities ‘need to see before we would have high confidence that indeed inflation is firmly on its way back to our target’, he said.

Naturally, if the message of the data were that further tightening was needed, then the ECB would tighten policy more, he said. ‘But that is purely a process issue’, he said. ‘And that’s just reflective of the uncertainty we’re living in in these conditions.’

There were many reasons for the economy to perform weakly this year, he noted. From the start of 2024, increasing real wages would support consumption whilst investment would start returning, leading to an economic pick-up, he said.

‘Let me emphasise … the overall environment remains, if you like, not fragile’, he said. ‘The banking system is in good shape. Because of the pandemic, household balance sheets … look in better shape than normal. Same for corporates. So, the kind of toxic mix, if you like, you need in order to kind of trigger a deep recession is not present.’

With higher borrowing costs limiting demand, firms that try to pass on higher energy prices may face resistance, he said.