ECB’s Lane: There is a risk to easing policy stance too quickly

  • If inflation turns out to be more persistent, easing policy stance too quickly would not be consistent in returning inflation back to target in a sustainable manner
  • Even if inflation does not smoothly decline during the rest of this year, further disinflation can be expected during the course of next year
  • It is straightforward that the calibration of the appropriate degree of restrictiveness should adjust for the impact of lower expected inflation
  • Keeping rates overly restrictive for too long could push inflation below target in the medium-term
  • That would require corrective action that could require rates to be below neutral
  • The breadth of domestic inflation dynamic is narrowing
  • ECB wage tracker is signaling that wage pressures have moderated since last year

In other words, it is a balancing act now for the ECB. They can’t ease too quickly but at the same time, they can’t leave policy rates as being too restrictive if inflation pressures continue to ease as they have been over the last year. That being said, they can easily opt for a 50 bps rate cut next if they are worried about the latter. So, the real risk to their credibility is getting it wrong with the former in my view.

This article was written by Justin Low at Source