Interview with Bloomberg TV
Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Paul Gordon on 17 June 2021
17 June 2021
I am here with ECB Executive Board member and chief economist, Philip Lane. The ECB has, of course, only recently, last week, pledged to maintain an elevated base of bond-buying through the next quarter. So it's not ready to go anywhere near tapering or anything like that at the moment, but let's have a chat with Philip and find out what the next steps might be. A very good day to you. The Fed yesterday, brought a little bit of a surprise. Certainly, it's taken a step towards tapering, a baby step. Does that influence how fast the ECB might move in that direction?
I think it's very important to recall that, of course, the pandemic is global, but in the end, where the United States is today and where the euro area is are so different, both in terms of the stage in the pandemic recovery, in terms of the reopening of the economy, but also in terms of the wider inflation dynamic, and fundamentally – there's a few days' difference in these meetings. Last week we had an assessment where inflation, even if it's a little bit high right now, is going to converge back to 1.4 per cent in 2023. So a low inflation medium-term pressure. The Fed has a very different medium-term outlook, and that difference really just means we can't spend too much time trying to compare central bank priorities on both sides of the Atlantic. We are just in a very different phase to the Fed.
The Fed noted that inflation has been stronger than expected. The readings in the eurozone have also been stronger than expected. I'm aware your forecasts don't see it as holding above target, but there was always the risk that there are surprises that start to seep into expectations. Your colleague Robert Holzmann, the Governor of the Oesterreichische Nationalbank, said at 3 per cent inflation the ECB would have to react, although he didn't say how and what that reaction would be. Would you agree with that kind of a threshold?
What's been interesting is that everyone is thinking more generally about inflation these days, but when you start to analyse it, the conditions under which those famous second-round effects might actually take hold, when we may actually see them in the data, are really most likely with a very strong labour market. Going back to that basic point, the basic difference between the European debate and the US debate is that we have a general measure of unemployment which is around 15 per cent. It's very difficult, when you have unemployment so high, to see very strong wage pressure. The wage negotiations we do see are coming in low, which is not surprising given the slack in the labour market. So the narrative of this second-round dynamic, of course we look at it, we monitor it, but you actually have to see it converted into wage decisions and pricing decisions, and we don't see it so far. The economics of it is that we know it's going to take a long time for the labour market to fully recover, and without that full recovery, the bargaining strength to compensate for rising prices, without that dynamic it's very hard to sustain that narrative.
So say you did get 3 per cent, or 5 per cent as in the United States, for one month, you would be happy to look through that?
At the ECB, like at all central banks, we know we have to have a medium-term orientation, for two reasons. One is that monetary policy doesn't work on a dime. We have no way to influence the inflation rate in the next month, two months, three months, even longer. The focus has to be on the medium term. When we know that the dominant sources of high-inflation readings are transitory factors, base effects, spikes which are going to reverse, we maintain our focus on the medium term.
So for the next quarter you're going to be maintaining favourable financial conditions and an elevated pace of bond purchases. Given that the market will be thinner – it's always thinner in the summer, the ECB has always slow-purchased in the summer – would you expect your pace of bond buying in the third quarter to be lower than the second quarter because you can have a bigger impact?
So I think it's very important to appreciate the philosophy of the pandemic emergency purchase programme (PEPP). Last week we had our meeting and we decided to maintain the same stance, and that the conditions where the economy is improving but there remains upper pressure on nominal yields are conditions where, essentially, we think the decision we made in March to step up remains a good decision, remains the best guidance. But with PEPP, we also have a very strong philosophical design, which is that we're not mechanical, in the sense of saying: “We will do X amount and no more and no less.”. (The alternative way of doing quantitative easing is to say: “We're going to buy X billion.”) And then the seasonality factor is easy, because you just rearrange. You know August is coming – August comes every year, it's not a surprise – and you rearrange your fixed schedule: more in other months, less in August. We don't have a fixed volume approach to PEPP.
This is why, the issue about the summer liquidity is secondary, because we want to observe, and we have the day-by-day flexibility. There could be investor shocks over the summer, in either direction, positive or negative, and so we very philosophically are determined not to express monetary policy as an exact ex ante volume, but to say: “We will purchase in response to market conditions.” So this is why it's kind of a subtle argument. Please remember seasonality is usually just a mechanical adjustment, which is, basically, unmet over the course of a period and adds up to zero – it's a rearrangement. But with PEPP, because we're buying flexibly in reaction to market conditions, we want to be sure that we look at everything on a frequent basis, and seasonality is just one factor.
So you've got a meeting coming in July, but one assumes that that's stocktaking. September is more likely to be the big one where you've got a new round of forecasts, your Strategic Review will be close to finished or maybe finished. Then you're six months before the scheduled end date of PEPP. At that point do you think you have to talk within the Governing Council on tapering?
We have tried to explain so much about PEPP. We've said from the word go that net purchases will remain so long as the pandemic crisis phase is with us. We said: ”How do we conduct net purchases?”. It's in order to offset the negative pandemic shocks to inflation, and in terms of implementation we're going to buy flexibly to preserve favourable financing conditions. All of those remain, and given that flexible philosophy, given the importance of thinking about the inflation outlook, given the unpredictability of the pandemic, I fully agree with President Lagarde that it's unnecessary and premature to talk about these issues. When we get towards a time – and let me focus maybe by saying that that time is state-contingent. It's state-contingent on what we are learning about the pandemic, first and foremost. So trying to box that into a particular calendar I don't think is very productive, while also agreeing with you, of course, as time moves on, as we get more good news about vaccinations, about dropping case rates, there will be a time when it's no longer premature and unnecessary to talk about it. But right now, the focus for me is, we're going into a very interesting summer, and the challenge of preserving favourable financing conditions, we have to keep our eye on that.
Going back to September, we will have new forecasts, but remember, we have a very strong forecast for quarter three, but quarter three is not over until the end of September. We're not necessarily going to have every piece of hard data you want to have going into the September meeting. If you recall, last year our beliefs about quarter three were quite different in September to the outcome. So September is, of course, going to be an important meeting, but there's going to be a lot of data coming in throughout the autumn, and I think it's a mistake – because we know from September onwards there's a lot that could be happening. It's not some kind of “turn-on-a-dime” situation where we're going to know everything at a point in time, but of course, we'll know a lot more over the summer.
It sounds like, though, potentially, September is also premature, given that it's still summer. It's not winter. We don't know what's going to happen to the virus during the winter. We don't know what waves we're going to get. So could we get an elevated pace of bond-buying right through to the end of the year, and December's the big meeting?
Again, I'm going to repeat, this all depends on what's happening to the pandemic itself, where the data come in, because, of course, I've mentioned to you that not all the hard data will come in, but there's so many forward-looking indicators. But I would say that, regardless of how the September meeting goes, there's going to be a lot of work to do between September, December, into next spring. And given the fact that the inflation outlook remains quite subdued, of course, it's a multi-year challenge for us. Having the accommodative monetary policy to bring inflation up towards where we want it to be, it's not a situation which is going to end very quickly. So we do have a sustained campaign ahead of us.
Just quickly, I mentioned the Strategic Review. You've got a weekend retreat coming up somewhere outside Frankfurt. The two big issues there, for most people, are the inflation goal and climate change. Are you nearly resolved? Are all the sticking points sorted on those?
What we've had over the last year, year-and-a-half, is a lot of analysis. Let me praise the work of the Eurosystem staff at the national central banks and the ECB. We've had amazing inputs into our discussions. We've had many discussions on individual topics, but it is fair to say at this point in time, over the summer, we do have to move from analysing and discussing to kind of forming our collective view about where we want the strategy to be. My own assessment is we've made a lot of progress. I think it's actually been a very interesting intellectual journey, but the whole point of a retreat such as this weekend is not to put ourselves under pressure. It's not a decision-making meeting; it's just a meeting in the spirit of every organisation who has a retreat, to be a little bit open-ended, relaxed and have a good conversation.
Most people would expect the inflation goal of below but close to 2 per cent, which Lagarde said can be confusing in her last press conference, to be dead. That's gone. There is going to be a hard 2 per cent. There's a lot of debate about how flexible you can be around that, but would they be wrong to jump to that conclusion?
Again, I think I'll be correct about procedure here, in that, as in many situations, nothing is decided until everything is decided. I think you've heard from many of my colleagues – I'm sure I've said myself – that, essentially, there is a downside to the current formulation, for the reasons you give. That one of the overriding philosophies of central banks these days is to try and be clear in our communication. Not always possible, but where we can, we've been clear in our communication, and I think everyone recognises the case for having a clearer expression of our inflation aim.
Climate change, that's been a thorny subject sometimes.
Here I think there's a lot of global convergence. Let me emphasise, of course, there are interesting and vital discussions about some operational issues, such as corporate sector purchase programmes. That's a global conversation, but the bigger issue for me as the chief economist is how climate change is affecting economic dynamics, and how the necessary carbon transition is going to be a very large structural change for the euro area economy, for the global economy in the coming years. It already is. We see it meeting-by-meeting. So the fact that you have to, as a central bank, consciously make the effort to make sure you're investing, to make sure you've got the framework, to make sure you're fully responding to the challenges of climate change, I think that's just necessary, and it's so important that we do it. At that level it's not controversial. You've seen it around the world. Look at the expansion of the Network for Greening the Financial System, look at the global movement, look at all the announcements from many central banks.
So I would say, of course, the ECB is very committed. I think we've been a prime leader in this. But what we have now is, essentially, a global movement where maybe some details will differ, but by and large everyone's moving in the same direction. It's not the fact that central banks have some special role here; it's the fact that the world's policymakers, in line with the Paris Accord, there's a huge job of work to do, and central banks need to play their part. A lot of this, of course, is just implementing what other policymakers are leading on in terms of disclosures, transition plans, carbon regulation, carbon pricing. All of these policy changes by others have a counterpart in how central banks need to behave.