ECB’s Lane: Neutral Rate ‘Has Its Role’ But Not Important Statistic for Next Meeting

5 February 2025

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council Chief Economist Philip Lane said on Wednesday that the neutral rate played a certain role but was not an important element of the next policy decision.

In a speech at the Peterson Institute for International Economics in Washington D.C., Lane said that the neutral rate 'has its role, but it’s not a sufficient statistic [that] for the next monetary policy meeting is important.’

There was ‘no single indicator’ that would determine whether the ECB’s monetary policy was restrictive or not when comparing it to r*, he said.

‘If you’re trying to work out the next two policy meetings, it’s not going to be all that helpful’, he said.

Monetary policy should take a ‘middle path’, according to Lane, as inflation was still facing upside and downside risks.

Disinflation could ‘stall out’ if the economy recovered faster than expected and the labour market did not weaken as projected, or if new price shocks spurred inflation again, he said.

However, the ECB should also focus on downside risks to inflation, he said.

‘An excessive abundance of caution in monetary easing could threaten the recovery in domestic demand that is needed to support the pricing environment needed to deliver 2% inflation’, he said.

‘It’s not a given that inflation settles at 2%’, he added.

These two-sided risks suggested that the ECB should take a ‘middle path’ where not too much weight was attached to upside or downside risks, he said.

‘And that robust policy approach balances the risks of moving too slowly against moving too quickly’, he said.

The December projections were holding up, he said, after acknowledging that the baseline scenario for inflation was confirmed by flash CPI data for January.

However, Lane said GDP for Q4 in the Eurozone came slightly below the ECB’s expectations in the December forecasts.

‘There’s has been a noticeable increase in energy inflation, but we have also seen, if you like, welcome indications of deceleration of services inflation’, he said.