ECB May Rethink Stimulus Exit If Outlook Worsens, Lane Says

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The European Central Bank would need to reassess its timetable for withdrawing stimulus if the souring economic outlook weighs on the prospects for consumer prices, according to Chief Economist Philip Lane.

Speaking Friday on CNBC after data showed euro-zone inflation surged to another record last month, Lane said net bond-buying will still conclude by the end of September if the current trajectory for prices is maintained.

Russia's invasion of Ukraine, however, is sapping confidence and threatening to derail Europe's pandemic recovery, which could alter that path. The ECB will need time to assess the situation, given the uncertainty the war has generated, said Lane, one of the institution's most dovish voices.

“If the medium-term inflation outlook is maintained, we'll be looking to end net purchases in the third quarter,” he said. “However, if the outlook deteriorates by so much that the inflation outlook weakens, then we will have to think again.”

So far, the Ukraine conflict has acted as a renewed driver for energy costs, which had already sent euro-area inflation to more than three times the ECB's 2% target. But it's also taking a toll on activity, with manufacturing gauges sagging and governments starting to downgrade their economic-growth forecasts. 

“What we have here is opposing forces,” Lane said. “We have the energy shock and the prospect of second-round effects pushing up inflation, and on the other hand the weakening of sentiment, and the fact that real incomes will suffer with high energy prices,” pulling down inflation.

A growing number of ECB policy makers are focused on the ramp-up in prices, with several advocating for one or more increases in record-low interest rates this year. Markets, too, predict two quarter-point hikes by December. 

In a speech Thursday, Lane already said the ECB should be ready to adjust monetary policy in either direction, stressing the importance of maintaining optionality that's “two-sided.”

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