ECB Insight: Hawkish at First Glance, Lane Nevertheless Leaves Room to Cut Next Week

28 May 2025

By David Barwick – FRANKFURT (Econostream) – When a European Central Bank Governing Council intervention is of particular interest, our own reporting is often followed by a curious look at what others make of what the policymaker said. Such was the case with Chief Economist Philip Lane’s interview Tuesday evening in German daily Frankfurter Allgemeine Zeitung.

The result of a brief review of what scant reporting on it there was at that point surprised us. An Austrian news portal, for example, led with the news that the ECB would ‘probably not cut to less than 1.5% or in large steps’.

As we see it, those are not the issues, at least not per se.

The suggestion that the deposit facility rate stands little chance of seeing 1.25% is after all only mildly interesting in and of itself. The most dovish Council members have given few grounds to think that the ECB was ever headed so far south, but in the end, being still quite far from such a level, there is scads of time for developments to either induce them to see it differently or instead to confirm Lane’s speculation.

The rejection of a 50bp cut on the other hand is a horse that expired long ago, even if we also contributed to its further beating yesterday via an interview with Governing Council member Christodoulos Patsalides. In any case, Lane only indirectly dismissed the idea (‘no one is talking about dramatic rate cuts’).

Overall, the contrast of the Austrian news portal’s reaction to Lane with our own reading was stark: such an interview sets off alarm bells in our collective head.

To our thinking, there were clearly hawkish aspects of the interview, or at least opportunities not taken to sound dovish. Lane was not so hawkish as to lead us to revise our belief that the ECB will cut rates next week (we will explain why), but we do conclude that overall, the amount of easing still to come may be lower than previously believed.

As we observed in this space on Monday, the macroeconomic projections, which in June are done by the Eurosystem, had a likely cut-off date for the technical assumptions of 14 May, with the updated forecasts finalised on 21 May.

The interview with Lane took place on 20 May, meaning that the ECB’s chief economist may not have had the final figures while speaking to the FAZ. However, he surely had a good idea of how those figures were going to look, and would have been certain by the time the final version of the interview was approved.

Lane confirmed that euro area disinflation was ‘on track’, only to promptly cut the legs out from under his own optimism by adding: ‘but unfortunately new challenges are emerging.’

To our mind, the circumstances that the ECB’s objective is all but reached and that further easing holds less and less appeal are not entirely consistent with another already slightly controversial cut precisely as ‘new challenges’ are manifesting. Challenges that, as Lane indicated, ‘could cause an inflation issue in either direction.’

We are always on the lookout for such rhetorical ‘yes, but’ devices in policymaker interventions as guides to their underlying sentiment, and another quickly followed. ‘There are a number of factors that could lead to lower inflation in the euro area’, Lane said. ‘But we also have to keep in mind that we don’t know the outcome of the negotiations between the EU and the United States.’

And yet another, as Lane repeated the idea of disinflationary elements and then immediately warned that ‘the picture could shift’.

Our attention was also drawn to what we understood as another warning, namely that ‘[o]ver the medium term, the impact of US tariffs on inflation could materialise, including through the exchange rate and energy prices.’ Following which Lane reminded that the medium term was the ‘main focus’ of monetary policymaking.

Had that been it, we would have interpreted the interview significantly more hawkishly. As it is, Lane ultimately avoided this perception, notably when he said toward the end of the interview that the ECB had to find a ‘middle path’ between ‘keep[ing] interest rates too high for too long’ and ‘cutting too much and too quickly’.

This by itself would already seem to imply that the adjustment of monetary policy is an ongoing process, and with the bias obviously to the downside, that further easing thus remains possible.

He reinforced this impression two sentences later by saying that ‘[i]f we see signs of further falling inflation, we will respond with further interest rate cuts’.

And tellingly, he supplemented that with the caveat that ‘the range of discussion is not that wide: no one is talking about dramatic rate cuts.’

This is of course a straw man of sorts, but a revealing one. By telling us not to expect y (which we had no expectation of anyway and which the FAZ had not inquired about), we are implicitly being told that we can have x. Y naturally being a 50bp cut, x the 25bp option.

Another dovish signal emerges in the subsequent question concerning whether interest rates are in neutral territory. Lane’s interest in leaving the ECB leeway to ease policy further is evident, as he defines ‘clearly accommodative’ to mean ‘rates below 1.5%’.

Of course, this is all just ‘for the sake of discussion’, he says, but Lane knows perfectly well that nothing about this interview is idle conjecture meant simply to pass the time of day.

When all is said and done, it stands to reason that if Lane had wanted to push back against the widely expected 25bp cut next week, then the interview missed its mark.

While the hawkish notes make us assign a June pause a slightly higher probability than seemed previously appropriate, we are left supposing that beating back expectations of a cut next week was simply not the objective.

On the other hand, as for further moves beyond June, Lane has underscored the uncertainty surrounding these.