(Bloomberg) — The European Central Bank wasn’t too slow to raise interest rates, and stabilized inflation expectations are evidence of that, Chief Economist Philip Lane said.
(Bloomberg) — The European Central Bank wasn’t too slow to raise interest rates, and stabilized inflation expectations are evidence of that, Chief Economist Philip Lane said.
Answering a question posed by former Bank of England policymaker Willem Buiter on Wednesday, the Irishman evoked prior episodes of hiking borrowing costs too early in a defense of the euro-zone monetary stance of the past year or so.
“There are two risk factors: being too late and also tightening preemptively when in fact that turns out to be a mistake,” Lane told the “ECB and Its Watchers” conference in Frankfurt. “The post-hoc thing — ‘well we’ve seen inflation therefore I conclude you were too slow in hiking’ — I’d like to counterbalance that with all those episodes in history where maybe some central banks hiked too quickly, and what happened then.”
That reference might include the ECB itself, which abortively raised rates in 2008 and 2011 only for financial-market turmoil to force a reversal each time.
The Frankfurt-based institution stood out last year for being one of the last of its peers to abandon ultra-low borrowing costs, a policy championed by Lane himself until hiking then began in July. His remarks may now be his most outspoken defence yet of that stance.
“How come we have deeply negative real rates if policy is meant to be restrictive?” Buiter had asked him, saying the ECB should have publicly stated this month that “contingent on financial stability being preserved, further rate hikes will be required. Significant further rate hikes.”
Lane said the ECB’s current stance accommodates that view, and then observed that — measured on a view of comparing one-year expectations for borrowing costs and inflation — “we have solidly positive interest rates throughout the horizon.”
“If people believed we were going to persist with super-low rates with the inflation rate we have, that would have been a huge disaster,” Lane said. “The fact that we did move quite a bit I think was sufficiently timely that we have not seen a major destabilization of expectations. And in fact, in recent weeks and months we’ve seen a much more of a stabilization or convergence.”
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