ECB’s Lane: Gradually Dialling Back Restrictiveness Is Best Approach; Pace TBD

16 September 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that if incoming data continued to confirm the ECB's inflation projections, it would be appropriate to gradually reduce the level of monetary policy restrictiveness, but the speed of the process would remain open. 

In a speech at the European Investment Bank Chief Economists’ Meeting in Luxembourg, the text of which was posted to the website of the ECB, Lane said, ‘Looking ahead, a gradual approach to dialling back restrictiveness will be appropriate if the incoming data are in line with the baseline projection. At the same time, we should retain optionality about the speed of adjustment.’ 

'In one direction, if the incoming data indicate a sustained acceleration in the speed of disinflation or a material shortfall in the speed of economic recovery (with its associated implications for medium-term inflation), a faster pace of rate adjustment may be warranted; in the other direction, if the incoming data indicate slower-than-expected disinflation or a faster pace of economic recovery, then a slower pace of rate adjustment may be warranted', he said. 

The decision to reduce the deposit facility rate (DFR) by 25bp was in line with the three ECB criteria and offered 'greater protection against downside risks that could delay the recovery and lead to a material undershooting of our target further out in our horizon', he said.  

'[O]ur confidence in a timely return of inflation to target is supported by declining uncertainty around our projections, including their stability across projection rounds, and by inflation expectations across a range of indicators that remain aligned with a timely convergence to target', he said. 

Moreover, with the adjustment in the DFR, the ECB could manage the upside risks to inflation by changing the pace of interest rate reductions, he suggested.  

'At a still clearly-restrictive level of 3.5% for the DFR, the realisation of upside shocks to inflation that would call into question the timely return of inflation to target could be addressed by a slower pace of rate reductions in the coming quarters compared with the baseline rate path that is embedded in the projections.' 

The 2025 assessment of the monetary policy strategy would focus on economic developments since the pandemic and the implications for monetary policy, he said.  

'We will furthermore examine the operationalisation of the medium-term orientation of the monetary policy strategy, with a focus on the ECB’s reaction function to both upside and downside threats to the anchoring of inflation expectations to the target', he said.