ECB’s Lane: Best Not Pre-Committing to Rate Path in Uncertain Environment

2 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane late Thursday said that keeping a data-dependent and a meeting-by-meeting approach was the best way to deal with unexpected events when calibrating the monetary policy stance.

In a lecture at Stanford Graduate School of Business, the text of which was posted on the website of the ECB, Lane said that ‘the robust approach to making rate decisions under conditions of high uncertainty is to avoid pre-commitments or creating unwarranted expectations about the future rate path.’

‘In particular, moving from one meeting to the next meeting and from one projection round to the next projection round allows for the accumulation of further data that can help inform the rate decision’, he continued.

The Governing Council would have to balance the forecast-based and the data-dependent criteria in its decision-making, he said, adding that while the first might require ‘front-loaded rate cuts’, the second ‘might call for a gradual and sequential approach.’

Considering that each criteria had its own merits, and the fact that the interpretation of incoming data could have several possible outcomes, ‘it is best not to commit to a pre-set path for rate decisions and preserve optionality’, he said.

Additionally, the easing process would have to consider three factors in order to keep a sufficient level of confidence about the convergence to the inflation target: the lags in monetary policy transmission, the evolution of inflation expectations and the two-sided risks in initiating the next phase, he said.

‘As expectations of future inflation normalise further, leaving nominal rates unchanged implies a mechanical increase in real interest rates’, he said.

On the two-sided risks, he noted that ‘easing policy too soon or proceeding too quickly would not be consistent with inflation sustainably returning to target if inflation turns out to be more persistent than anticipated’, and that ‘keeping rates overly restrictive for too long could push inflation below target over the medium term and incur excessive side effects in terms of sacrificed output, employment and investment.’

The materialisation of the second risk would ‘require corrective action through a subsequent acceleration in rate cuts’, he warned.