In a speech to the academic world in Berlin at the beginning of March, Philip R. Lane, member of the executive board of the European Central Bank, spoke about the monetary policy strategy of the euro area.
The next, highly anticipated, ECB Governing Council meeting will be held on 10 March, against the backdrop of the war in Ukraine.
The ECB will also ensure that liquidity conditions are functioning well and that citizens have access to liquidity… in order to guarantee price stability.
“The ECB will also ensure the smooth functioning of liquidity conditions and citizens’ access to liquidity... in order to guarantee price stability,” said Lane. ECB staff have indeed revised their March projections to include the implications of the Russian invasion of Ukraine.
Extraordinary rate of energy inflation
The ECB’s inflation estimate for February, published in early March, was 5.8%. Lane highlighted the upward pressure on headline inflation from “the extraordinary rate” of 31.7% of energy cost increases.
“The increases in sectoral inflation rates for food, goods and services partly reflect the impact of higher energy prices on production costs in all energy sectors,” he said.
As regards net asset purchases under the asset purchase programme, forecasts indicate that they will be maintained for as long as necessary to reinforce the accommodative effect of policy rates and that they should end shortly before the ECB’s key interest rate hike.
As a key element of the ECB’s monetary policy strategy, net asset purchases are expected to continue in this environment: “As regards net asset purchases under the asset purchase programme, forecasts indicate that they will be maintained for as long as necessary to reinforce the accommodative effect of policy rates and that they are expected to end shortly before the ECB’s key interest rate hike.”
Creation of new instruments
As for interest rate forecasts, Lane reiterated that they would not be raised until “three essential conditions” were met. Firstly, the inflation rate must reach 2%. Second, it must persist on this trend. Third, core inflation must be consistent with stabilising inflation at 2%.
In the current circumstances where inflation projections vary from month to month, “policymakers need to strike the right balance in responding to them”. On the one hand, according to Lane, if the projections indicate that the inflation target will be achieved within the projection horizon, waiting for inflation to converge towards the target could be “excessively costly”. On the other hand, tightening monetary policy in response to temporarily high inflation “would be counterproductive”.
The governing council may also resort, if necessary, to... asset purchases and longer-term refinancing operations.
The anchor of the ECB’s strategy thus seems clear: “We will conduct monetary policy aimed at stabilising inflation at 2% over the medium term”. Advocating flexibility, “the governing council may also resort, if necessary, to... asset purchases and longer-term refinancing operations”. Faced with the current and future challenges of the euro area, Lane suggested that the governors could consider new policy instruments.
Originally published in French by and translated for Delano