ECB’s Lane: Our Rate Path Has Brought ‘Substantial and Timely Progress in Disinflation’

18 November 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that the interest rate path of the ECB had succeeded in engineering disinflation in a timely manner and that the ECB had commenced tightening with more or less proper timing under circumstances of high uncertainty and imperfect knowledge.

In a speech at the SUERF Marjolin Lecture hosted by the Banca d’Italia in Rome, Lane, who mostly avoided current monetary policy and in favour of discussing the policy response to 2021 and 2022 inflation, said that ‘the interest rate path actually followed has delivered substantial and timely progress in disinflation.

In considering the ECB’s reaction in the face of the inflation surges earlier in this decade, simulations suggest that the policy response was ‘broadly appropriate’ given what authorities knew, he said.

Some risks might have warranted an earlier start of policy tightening, but some uncertainties, such as that around the Russian attack on Ukraine, would have justified waiting to start hiking, he said.

In any case, the analysis his speech was based on indicated that ‘minor variations in the start date would not have had a large impact’, he said.

If in assessing the ECB’s timeliness it were stipulated that the baseline projections were to dictate policy alone, then the first hike should have taken place approximately one quarter sooner, he said. However, other considerations outside the ambit of the ECB's forecast model also figured in its decisions in spring 2022, he said.

‘A slightly earlier lift-off would only have had a very limited effect in dampening the scale of the inflation surge and a one quarter delay in liftoff provided insurance against the risks of tightening too early’, he said.

Complete awareness of the extent of the inflation shock would have led to ‘significantly earlier’ tightening, he said, noting that ‘the projections in early 2022 still signalled a return to below-target inflation over the medium term as they could not foresee as central tendency the protracted war in Ukraine and the drastic disruptions in the supply of Russian gas to some European countries.’