In a keynote speech on 16 September 2024 at the European Investment Bank chief economists’ meeting, Philip R. Lane, a member of the executive board of the European Central Bank, outlined the ECB’s current stance on monetary policy. Lane emphasised a “meeting-by-meeting and data-dependent approach that maintains two-way optionality and flexibility for future rate decisions,” reflecting the ECB governing council’s latest strategy.
Lane stated, “The incoming data on wages and profits have been in line with expectations.” He added that the ECB’s baseline scenario, according to the latest staff projections, foresaw a demand-led economic recovery that would boost labour productivity. This would allow firms to absorb the anticipated growth in labour costs without significantly impacting their profitability. “This should buffer the cost pressures stemming from higher wages, dampening price increases,” Lane noted. He observed that most measures of underlying inflation, including those with a high predictive content for future inflation, “were stable at levels consistent with a return of inflation to target in a sufficiently timely manner.”
Lane added that while domestic inflation has remained elevated due to pay rises, “the projected slowdown in wage growth next year is expected to make a major contribution to the final phase of disinflation towards our target.” He further commented on the restrictive nature of current financing conditions, noting, “Financing conditions for firms and households remain restrictive, as our past policy rate increases continue to work their way through the transmission chain.” Credit growth has remained sluggish amid weak demand.
Based on this assessment, Lane argued that it was now appropriate to moderate the degree of monetary policy restriction. The ECB on Thursday 12 September 2024 to lower the deposit facility rate by 25 basis points to 3.5%. “The decision to lower the DFR by 25 basis points is robust across a wide range of scenarios,” he explained, justifying this move by stating that, at a still clearly restrictive level of 3.5%, the realisation of inflationary shocks could be addressed by a slower pace of rate reductions in the coming quarters. Conversely, a deposit facility rate of 3.5% offers greater protection against downside risks that could delay the recovery and lead to a material undershooting of the inflation target, compared to maintaining the rate at 3.75%.
Future assessments
Looking ahead, Lane suggested, “A gradual approach to dialling back restrictiveness will be appropriate if the incoming data are in line with the baseline projection.” He elaborated that the ECB’s 2025 assessment would focus on “two broad strands: economic developments since the pandemic; and the implications for monetary policy.” The assessment will also review the impact of the changed inflation environment on the monetary policy strategy, including “lessons learned from low and high inflation periods and our experiences with the evolving roles of the instruments in the policy toolkit.”
Lane added that the ECB would also examine “the operationalisation of the medium-term orientation of the monetary policy strategy,” focusing on the ECB’s reaction to both upside and downside risks related to inflation expectations. This will include analysing how risk and uncertainty should inform policy decisions and communication strategies.
The ECB’s rate-setting governing council is scheduled to convene again on 17 October and 12 December this year.