Mr. Lane, is the normalization of monetary policy in the euro zone getting closer?
In a time of high volatility and a lot of uncertainty, no absolute statements should be made. However, the data do suggest that we could move closer to our medium-term inflation target.
Has your assessment of the necessary monetary policy changed as a result of the escalation of the Ukraine crisis?
We will make a full assessment of the economic outlook at our March meeting. This includes recent geopolitical developments. These not only affect oil and gas prices, but also investor and consumer confidence, trade and so on. So when it comes to inflation, there is not just the mechanical effect of commodity prices. With regard to the medium-term inflation outlook, the macroeconomic implications also need to be considered. The geopolitical tensions are currently a very important risk factor, especially for Europe. We had already pointed this out at our February meeting.
So the March meeting of the Governing Council could be exciting. What will happen next with bond purchases and key interest rates?
It is important not to prejudge the ECB Governing Council’s decision in March. A lot can still happen before then, and there is a lot of uncertainty in the world. But our strategy is clear: we want to stabilize inflation at 2 percent in the medium term. There are three options on the way there. If the medium-term inflation forecasts are much lower than our target, the ECB will have to adopt an accommodative, ie loose, monetary policy. If inflation is above our target in the medium term, we need to tighten monetary policy. The third possibility is that inflation approaches our target, in which case, as we say, a normalization of monetary policy will suffice.
What are you seeing at the moment?
Inflation rates are high at the moment, at 5.1 percent in January. But we expect them to fall over the course of the year. However, it is uncertain how fast and how far. How inflation develops over the medium term is crucial for monetary policy. If rates now move towards our target in the medium term, which seems to be the case at the moment – instead of being well below 2 percent as before the pandemic – we will adjust monetary policy. Because then we would no longer need to buy bonds, for example, to stabilize inflation at our target value in the medium term. It was different in December, when surveys still reflected the expectation that we would have to maintain bond purchases until the middle of next year. But that schedule could be shorter than anticipated at the time.
Some critics believe that the ECB will not dare to end its bond purchases if interest rates on the debt of some countries then rise and there is a risk of fragmentation on the bond market, almost like back in the sovereign debt crisis…
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