ECB Insight: Lane, Warming to Looser Monetary Policy, Avoids Mention of ‘Caution’

27 May 2024

By David Barwick – FRANKFURT (Econostream) – There having been essentially no question for some time about the main decision to emerge from the European Central Bank Governing Council’s 6 June meeting, Monday’s confirmation of the imminent rate cut by Executive Board member Philip Lane is less newsworthy than his other comments - and what he failed to say.

‘[I]t is probably fair to say that, barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction, being at 4%’, he said in an FT interview. ‘Top level’ one can understand to mean 25bp, also quite as expected, a 50bp step having been rejected a while ago.

More interesting is what comes next, when Lane is invited to confirm that the ECB will take a ‘cautious approach’ (the interviewer’s words) post-June, in view of upside inflation risks that the interviewer helpfully identified.

The ECB’s chief economist didn’t accept the invitation with the enthusiasm we would have expected. ‘Things will be bumpy and gradual’, he began, characterising inflation developments in the standard manner.

‘The best way to frame the debate this year is that we still need to be restrictive all year long’, he continued. ‘But within the zone of restrictiveness we can move down somewhat.’ Provided, he added, that the data support this.

In and of itself, all this was known. The June cut is the beginning, not the end, and total easing of 75bp in 2024, a reasonable benchmark at the moment barring unanticipated developments, would leave ECB monetary policy in restrictive territory.

Next year would be the time to discuss normalisation, Lane said, drawing a contrast with the current year, in which the debate ‘is about staying restrictive’ to a data-dependent degree.

The ‘quite a few meetings’ left in 2024 are for pondering the suitability of further rate cuts, he said.

There was never any confirmation of the need for caution the FT had been inquiring about. Lane never used the word himself anywhere in the interview, in marked contrast to his Board colleagues in their most recent interviews (more on that below).

Indeed, Lane at no point seemed even implicitly to advocate for caution to a degree consistent with recent communication by many Council members, for example by taking an arm’s-length view of the subject of additional easing.

Rather, he was all too glad to confirm – in broad terms, of course – the how of further rate cuts, the whether seemingly taken for granted.

The FT doubtless noticed Lane’s willingness to entertain post-June steps, and inquired explicitly as to whether the July Council meeting could bring one.

‘It is not particularly helpful for me to get involved in that meeting-by-meeting updating of what we are going to do’, Lane answered. ‘That is secondary or tertiary to the overall issue, which is having a sense that the wage data will decelerate fairly gradually.’

We can’t help but think back mere days to the interview published Friday with Board member Isabel Schnabel. Asked about prospects for ‘further rate cuts in the coming months’, she cited the same reasons for caution that, in Lane’s case, the FT had proactively noted.

‘We are monitoring the situation closely and ought to give ourselves sufficient time’, Schnabel said. ‘I would caution against moving too quickly because there is a risk of cutting interest rates too fast. And we should definitely avoid that.’

And when in another interview published on 17 May she was asked about July, she did not beat around the bush. ‘Based on current data, a rate cut in July does not seem warranted’, she said. ‘We should follow a cautious approach.’

ECB Vice President Luis de Guindos was similarly guarded on the subject of the extent of policy easing this year in the interview released Thursday.

‘There is a huge degree of uncertainty’, he said. ‘We have made no decisions on the number of interest rate cuts or on their size. We will see how economic data evolve. … We must remain very cautious.’

There is a rather wide gap between the tentative attitudes of Schnabel and de Guindos and the ‘presumptiveness’ exhibited by Lane.

Did something over the weekend change in such a way as to make the ECB more open to easing than it had been? Does Lane know more than his colleagues? The hard wage data released Thursday, which Schnabel and de Guindos presumably lacked (whereas Lane's interview was conducted on Friday), didn't really support abandoning caution.

In this context, it may be worth noting that Lane, who as chief economist would have a better idea before others of how the ECB’s updated macroeconomic projections will look, may have another reason for being optimistic about the outlook for more rate cuts and less caution. At a minimum, we assume that when the new forecasts are uneviled on 6 June, they won't make the shift of his focus away from caution look entirely misguided.