ECB’s Lane: To React Symmetrically to Undershooting and Overshooting

2 December 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Philip Lane on Monday said that the ECB Governing Council would react symmetrically to threats of undershooting and overshooting its inflation target.

In a podcast of the FT, Lane said, ‘We take a symmetric view. We will respond to the risk of undershooting as well as the risk of overshooting.’

The ‘most basic macroeconomic view’ was the question ‘do we have the level of interest rates to deliver an economy that’s growing quickly enough to support a 2% target?’, he said.

Credit also had to be considered, but with credit growth ‘still very muted’, it was not presently driving inflation, he said.

The interest rates applied by banks when lending to homebuyers and companies had not decreased in tandem with ECB rates, he said. This meant that ‘we are clearly still restrictive’, he said.

Lane appeared to react lukewarmly to the recent suggestion of ECB Governing Council member and Banca d’Italia Governor Fabio Panetta that the ECB should stop saying it would remain sufficiently restrictive for as long as needed.

‘So, over some period of time, I’m confident that we do have to make a transition’, Lane said. ‘But again, let me step back from any particular timeline for that.’

The ECB had needed its policy to be restrictive, he reminded, and was not completely out of the woods yet such that this was no longer the case.

‘I don’t think we’re 100% there yet’, he said. ‘We still have to, if you like, guide services inflation down to a level consistent with inflation overall being 2%. So there is a little bit of distance to go.’

Once inflation had been successfully reined in, monetary policy would need to ‘be essentially forward-looking, and to be scanning the horizon for what are the new shocks that might lead to less or more inflation pressure’, according to Lane.

That meant that ‘at some point, we will make the transition from having been driven by this very important disinflation challenge to the new challenge of basically keeping inflation at 2% on a sustainable pace’, he said.

As the ECB shifts away from looking backward, data-dependence would become less important in favour of ‘essentially assessing the incoming risks’, which was not data-dependency since the data might not yet reflect these, he said.

Lane maintained that the euro area in the coming years could still expect economic recovery. During 2025, inflation would subside to ‘a more sustainable neighbourhood of 2%’, he said, noting again however that services inflation had to decline.

In the context of US President-elect Donald Trump’s threats to impose tariffs, Lane expressed the hope that ‘as much as possible of the world trading system is preserved.’

The inflation effects of trade disruption went in both directions, so that it couldn’t be stated ‘that there’s necessarily a net bias in either direction’, he said. Rather, ‘what exactly happens will very much depend on the exact sequence of events’, he said.