A cast of hawks hold sway at ECB meetings amid inflation crisis
Economist Central Having Picture: Dove Respond Rate Chief Demands Over Sam Bank To European To Rises Philip Lane: The Boal Hawkish
European Central Bank (ECB) chief economist Philip Lane has spent much of this year losing the argument over rapid interest-rate hikes that his colleagues have demanded, and he might need to get used to it.
That means a pivotal policy maker, who used to be treated by investors as the key Governing Council member to watch, is having to redefine his role as he effectively follows his colleagues’ lead in crafting the most aggressive monetary tightening in ECB history.
“He might be the chief economist, but I don’t have a sense that he’s driving the debate,” said Nick Kounis, an economist at ABN Amro in Amsterdam. He added:
It is the job of the dovish Mr Lane to propose changes in borrowing costs, and yet his recommendations are often seen to be catching up to hawkish demands for bigger moves than the “steady” pace he favours.
The ECB has raised rates twice since July, each time more than initially flagged.
It trails US-led global monetary tightening, after Frankfurt officials set aside forecasts that hindsight shows to be wildly optimistic. Inflation in the past quarter was more than triple what officials projected in December.
Rate hiking is likely to continue, but may feature more finely balanced judgments as euro-zone growth gets crushed by the energy crisis that is stoking consumer prices.
The shift in the dynamic shaping such ECB decisions was relayed by multiple officials who spoke to anonymously for this story, declining to be identified because internal discussions are confidential.
They describe a landscape in which the 53-year-old Mr Lane is far less influential in determining outcomes than he was in first years of Christine Lagarde’s presidency of the ECB.
He began that as the standard bearer of the dovish views of her predecessor, Mario Draghi, under whose reign he was appointed.
As the inflation shock hit, his central role in defining policy slipped and is now seen as considerably less than those of predecessors ranging from Otmar Issing, the ECB’s first chief economist, to Juergen Stark, who dramatically quit a decade ago.
Mr Lane remains the most prominent dove in the faction of officials sharing his views, but a cast of hawks sway meetings where Ms Lagarde insists on consensus.
Unlike last year, observers and participants say there’s no single policy maker in the driving seat — including the president, who chairs meetings and brokers compromises.
Among key players are national central bank chiefs Joachim Nagel of the Bundesbank and Klaas Knot of the Netherlands, who push for more aggression and tend to win, together with colleagues from Baltic and eastern European countries. Executive Board member Isabel Schnabel articulates the intellectual case for doing so.
Meanwhile, Mr Lane’s calls for more measured action tend to be set aside — an outcome that, in some respects, is arguably quite normal for a central bank with multiple policy makers.
“It’s not very realistic to have that many people around the table agreeing on the size of the hike in such an uncertain environment,” said Marco Valli, an economist at UniCredit.
What makes Mr Lane’s position trickier, beyond the challenging economic juncture, is the paradox of acting both as navigator and passenger within the Governing Council.
In comments to the chief economist stressed that the degree of disagreement isn’t fundamental, and that he remains comfortable with his role in the decision-making process.
“The system works when a proposal makes economic sense and a consensus is reached,” he said.
Arguments on tactics such as the size of hikes, and the need to galvanise around one outcome, could yet become more fraught as the discussion moves on to more contentious matters such as how much to tighten monetary policy overall.
Given that possibility, Mr Lane’s comments raise the prospect that his willingness to accommodate more outlandish policy initiatives might have its limits.
“I won’t propose something that I don’t believe in,” he said.
- Bloomberg