How hawkish was Lane really? – Commerzbank

ECB chief economist Philip Lane also spoke in Jackson Hole. The most important message for the currency market was probably: ‘The return to target is not yet secure.’ If you read this passage in context, Lane seems to be trying to show that there are risks on both sides. He goes on to say that ‘A rate path that is too high for too long would deliver chronically below-target inflation over the medium term and would be inefficient in terms of minimizing the side effects on output and employment’, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

There are risks on both sides

“Lanes’ comments would only justify EUR optimism if one had to assume that he considers the former risk (too rapid interest rate cuts) to be greater than the second (too high-interest rate level). However, Lane’s speech was actually about evaluating the effectiveness of monetary policy. The effectiveness is by no means obvious. Perhaps monetary policymakers would be better advised to have more self-doubt.”

“Their activities are beyond the control of politicians. But this also means that there is no political corrective mechanism to ensure that a policy that has become bogged down in misconceptions is corrected in the long run. In my opinion, where this corrective mechanism is lacking, it is all the more necessary for the monetary policy actors to proceed with humility and self-criticism.”

“For me as an FX analyst, this is relevant because when evaluating exchange rates, we naturally have to ask ourselves, among other things, how likely it is that central banks will make mistakes. They may be in a cycle of interest rate cuts, even though inflation might not been sufficiently combated yet. In the past, the ECB has done a lot of things that, in retrospect, were wrong. Sometimes I wonder whether at least some of these mistakes could have been avoided if the players in the Frankfurt ECB tower had been more aware of their own fallibility.”