ECB’s Lane: Can Normalise Policy ‘Only When We Are Sufficiently Confident’ Of Hitting Target

16 October 2023

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that monetary policy normalisation required that the ECB first be sure enough of the restoration of price stability.

In an interview with Dutch daily Het Financieele Dagblad, Lane said, ‘If we have inflation shocks that are sufficiently large or sufficiently persistent, we have to be open to doing more. We think inflation will return to 2% by 2025. Only when we are sufficiently confident of reaching that target, we can normalise policy.’

‘But this is quite some distance from where we are now’, he continued. ‘I personally will need more information about the wage settlements for 2024, and we will have to wait until spring next year before many countries release that information. So it’s going to be some time before we can have a high degree of confidence that inflation is on its way back to 2%.’

Wage growth would have to decelerate next year, he said, for price stability. ‘The unions know that the ability of firms to pay higher wages depends on the economic environment’, he said. ‘And given the current, restrictive monetary policy we expect the economy to be pretty stagnant for the rest of this year and to grow modestly next year.’

The impact of policy tightening had not yet been fully felt, he said, noting that holders of fixed-rate mortgages were still shielded from the rise in borrowing costs.

With respect to quantitative tightening, Lane shed little light on potential policy changes. ‘Compared with interest rates, the role of the balance sheet is of secondary importance’, he said. ‘The most effective way to tighten policy further, if necessary, is to further increase the interest rate.’