ECB’s Lane: Uncertainty Often Argues for Gradual Approach to Policymaking

24 July 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Wednesday said that in many cases, uncertainty called for a gradual approach to setting monetary policy.

During a panel at a joint conference of the ECB, International Monetary Fund and IMF Economic Review, Lane said, ‘So in relation to uncertainty about the strength of monetary policy transmission… I think in a lot of setups that uncertainty means you should go more gradually.’

‘If the uncertainty is about how persistent is the inflation process, waiting and seeing and letting that persistence lock in is a problem. So under that scenario you go more quickly’, he said.

When deciding whether to wait or to cut interest rates, the strategy should take into account previous decisions, he said.

‘So even then there isn't the universal answer between when you go more slowly when you go more quickly’, he said. ‘And then I do think it's not only about the first decision. OK, I'm going to wait, but conditional on when I crystalise, I need to respond. Then you move quickly in order to make up for the kind of initial delay in making your assessment.’

The role of central banks was to be a source of stability, especially in moments of uncertainty, he said.

‘That does not mean that if a shock arrives that inflation will always be at 2%’, the said. ‘That's not the promise, but the promise is if there is a significant persistent deviation, there will be a response to make sure inflation comes back to 2%.’

When assessing how uncertainty and future events might impact monetary policy at present, it was necessary to consider how firms, households and investors were reacting to that same uncertainty, he said.

‘Another way of saying this is we like to do trend cycle decompositions’, he said. ‘But in doing that trend cycle decomposition you have to allow for the fact that the trend is moving. It's not some kind of stable world.’