ECB’s Lane: Need International Coordination, Collective Effort to Address Structural Shifts

28 November 2024

ECB’s Lane: Need International Coordination, Collective Effort to Address Structural Shifts
Philip Lane, chief economist of the European Central Bank, at the ECB Governing Council meeting in Ljubljana on October 16, 2024. Photo by Andrej Hanžekovič/ECB.

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Thursday said that countries acting together stood the best chance of rising to the challenge of the diverse structural changes underway.

In a speech at the Euro50 Group’s 25th anniversary at the Banque de France in Paris, Lane, who avoided current monetary policy topics, said, ‘I want first to emphasise that the common nature of these structural trends means that international coordination and collective action is the best approach to navigating these challenges.’

The EU still had much room for collaboration as a union, he said.

‘In terms of economic and financial policy, the recent Draghi and Letta reports show how further integration can improve both the dynamism and the resilience of Europe, which would make it much easier to deal with the challenges I have just mentioned’, he said. ‘This includes the high potential gains in stepping up progress in relation the capital markets union and the banking union.’

Central banks had to assess the ramifications of structural changes for inflation, given the potential of such changes to influence inflation and the natural rate of interest, he said.

In one scenario, structural changes might not affect inflation if the economy adapted smoothly, but in another, the expectation of a positive structural shift could boost demand before supply can expand, leading to a short-term inflationary episode, he said.

Alternatively, the expectation of a negative structural shift would amount to a negative shock to current demand and hence be disinflationary, he said.

‘In either case, whether monetary policy should respond will depend on the expected size and duration of the inflation shock, together with an assessment of the fragility of the inflation anchor to the shock’, he said.

Another scenario involving an immediate negative or positive supply shock rather than an expectation of one would entail greater or less price pressure, respectively, he said.

‘In essence, the challenge for central bankers will be to calculate and re-calculate the appropriate monetary policy stance that is robust to the emergence of these various scenarios or combinations of scenarios’, he said.

The large variety of structural shifts currently taking place meant that all scenarios could theoretically materialise at the same time across different sectors and countries, he said.