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Highlights of Chief Economist Lane's speech

ECB
  • "Our upcoming September monetary policy meeting will be the start of a new phase... In terms of execution, this new phase will consist of a meeting-by-meeting (MBM) approach to setting interest rates... As policy rates move away from the lower bound, the inherent flexibility of the MBM approach is better suited to calibrating monetary policy in a highly uncertain environment."
  • "Our July monetary policy statement signalled that further normalisation of interest rates will be appropriate: the scale and timeline of rate adjustment will be determined by the evolution of the terminal rate and the appropriate speed in closing the gap between the current rate and the terminal rate."
  • "Meeting-by-meeting, an important element of the monetary policy debate will be the discussion of our latest assessment of the appropriate terminal rate that takes into account the evolution of cyclical factors, in addition to assessing a potential role of structural forces in shifting the underlying long-term equilibrium real interest rate."
  • "Turning to the appropriate speed in closing the gap between the prevailing policy rate and the appropriate terminal rate, it is important to appreciate that the middle and longer segments of the yield curve, which are most important for determining financing conditions in the economy, are much more sensitive to the expected terminal rate than to the precise timeline for converging to the terminal rate. A steady pace (that is neither too slow nor too fast) in closing the gap to the terminal rate is important for several reasons."
  • "First, there is uncertainty about the transmission of policy rate changes to overall financing conditions... Second, the current high uncertainty about inflation dynamics and monetary policy transmission means that a multi-step adjustment path towards the terminal rate also makes it easier to undertake mid-course corrections if circumstances change."
  • "Market-based indicators of inflation risk and the right-tail of responses in the expert and household surveys also clearly show that the risk of inflation not returning to target in a timely manner is priced by market participants and feared by some survey respondents. As indicated in our recent monetary policy statements, such above-target revisions to some indicators of longer-term inflation expectations warrant close monitoring."
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