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ECB: Lane Suggests Both Holdings Rates and 50bp Cuts Are Part of ECB's Toolkit

ECB
BundesbankCentral Bank NewsFixed Income BulletsCEEMEAEurozoneGermanyBulletMarketsEuropean Central BankForeign Exchange Bullets
  • The main conclusion from ECB Chief Economist Lane's speech is that the ECB's "data-dependent" and "meeting-by-meeting" approach is likely to stay. In this context, Lane notes that "remaining open-minded about the speed and scale of adjustments is in fact a valuable strategy across various environments, as different situations may necessitate distinct approaches". We don't think this should be regarded as any form of tacit support for a larger 50bp cut as soon as December, but it highlights that larger moves are still part of the ECB's toolkit if required.
  • Similarly, the speech highlights that the ECB may have considered holding rates in December (under the assumption that at least a 25bp cut is very likely, in line with market pricing) had data outturns been stronger.  The following extract from the speech was also noted in the October meeting minutes, as rationale for the cut at that meeting: “If the slowdown signalled by recent economic activity indicators and the below target inflation print in September prove to be temporary, a decision to cut rates in October could, ex post, turn out as merely having brought forward a December cut. By contrast, if the recent data signalled a more persistent weakness, which confirms a stronger disinflationary process, cutting in October would, ex post, signal a nimble adjustment of policy to changing macroeconomic conditions”.
  • Lane also notes that  "the evidence suggests that the transmission of monetary policy has been forceful and stronger than the historical pattern”, while highlighting that some of the ECB's work in extracting "insights from the joint distribution of inflation and GDP" sugests that "by end-2026, the probability of inflation undershooting the target is now greater than the probability of overshooting".

 

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  • The main conclusion from ECB Chief Economist Lane's speech is that the ECB's "data-dependent" and "meeting-by-meeting" approach is likely to stay. In this context, Lane notes that "remaining open-minded about the speed and scale of adjustments is in fact a valuable strategy across various environments, as different situations may necessitate distinct approaches". We don't think this should be regarded as any form of tacit support for a larger 50bp cut as soon as December, but it highlights that larger moves are still part of the ECB's toolkit if required.
  • Similarly, the speech highlights that the ECB may have considered holding rates in December (under the assumption that at least a 25bp cut is very likely, in line with market pricing) had data outturns been stronger.  The following extract from the speech was also noted in the October meeting minutes, as rationale for the cut at that meeting: “If the slowdown signalled by recent economic activity indicators and the below target inflation print in September prove to be temporary, a decision to cut rates in October could, ex post, turn out as merely having brought forward a December cut. By contrast, if the recent data signalled a more persistent weakness, which confirms a stronger disinflationary process, cutting in October would, ex post, signal a nimble adjustment of policy to changing macroeconomic conditions”.
  • Lane also notes that  "the evidence suggests that the transmission of monetary policy has been forceful and stronger than the historical pattern”, while highlighting that some of the ECB's work in extracting "insights from the joint distribution of inflation and GDP" sugests that "by end-2026, the probability of inflation undershooting the target is now greater than the probability of overshooting".