By Marta Vilar – MADRID (Econostream) – European Central Bank Chief Economist Philip Lane said on Thursday that the ECB's 25bp rate increase this month was a "delta response" to a higher inflation outlook, adding that estimates of the neutral rate were less relevant for current policy decisions than the change in the inflation outlook.
In a fireside chat at the Deutsche Bank Forum in London, Lane said that the ECB had assessed the June rate increase against a range of scenarios and concluded that tighter policy was warranted even under the milder scenario.
"We were comfortable that hiking made sense even under that milder scenario where the price of oil goes back to the low $60s in the next couple of years," he said.
Lane said the ECB expected inflation to remain above target for an extended period and that the rate increase was intended to limit the pass-through of higher energy costs into broader price pressures.
He described the current episode as a medium-sized shock with "medium-level persistence", requiring a measured monetary policy response.
Asked whether the ECB risked repeating the experience of 2011, when it raised rates shortly before reversing course, Lane argued that today's environment was fundamentally different because the financial system was not under stress.
“Our assessment [now] is: the banking system in Europe is well capitalized liquid, it's in solid shape; the household sector is in solid shape and non-financial corporates,” he said. “So, we don't see financial stress as being a kind of reason why a rate hike could go wrong, if you like.”
Turning to the neutral rate, Lane said the ECB's latest increase had been delivered from what he considered a broadly neutral policy stance, but noted that estimates of the neutral rate were more relevant for where policy might settle once the current shock had passed.
Lane said the upper end of the ECB's range of neutral rate estimates had "crept up" from around 2.25% to 2.50%, adding that different models produced different results and that observers could draw their own conclusions about which estimates they found most convincing.
He said that discussions about the neutral rate were primarily relevant for the period after the current inflation episode had run its course.
“I would say that's not so much about what's happening right now, it’s more when you get beyond this episode, where we might revert to,” he said. “Because right now I think you just focus on the delta; we have this year’s inflation going up by about a percentage point from 2% to 3% in terms of our central forecast, and we've increased the rate by 25bp.”
“So that, if you like, is a delta response,” he added. “But it's kind of measured.”
Lane also pointed to the resilience of the euro-area economy, noting that employment remained stable and real incomes were continuing to rise.
Unlike during the 2022 energy shock, wage growth was currently outpacing inflation, he said, with wages increasing at around 3.2%.
“So, what that means is we think consumption will be okay,” he said.
Asked about factors that had previously been expected to exert downward pressure on inflation — including euro appreciation, lower-priced Chinese imports and advances in artificial intelligence — Lane said the first two were still weighing on prices.
The stronger euro continued to exert downward pressure on the price level, while competition from Chinese imports was also helping to restrain inflation, he said, although he suggested that effect would eventually fade.
As for AI, Lane said it was too early to conclude that its impact would necessarily be disinflationary.
Asked whether the ECB would have held rates or delivered a 50bp hike absent the 25bp increase, Lane said, “I think that's beyond my capacity to try to answer that question.”
Related articles: