ECB lane supposed to lead policy but keeps losing argument

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The European Central Bank’s chief economist, Philip Lane, has spent much of this year losing the argument over the rapid interest rate hikes his colleagues have demanded, and he may need to get his back. get used to it.

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It is the job of the dovish Harvard University-educated civil servant to propose changes in borrowing costs, yet his recommendations are often seen as catching up with hawkish demands for larger moves than the “regular” pace that he privileges.

It means a key policymaker, who was previously treated by investors as the key member of the Board of Governors to watch, must redefine his role as he effectively follows the lead of his colleagues in crafting monetary tightening. the most aggressive in the history of the ECB.

« He may be the chief economist, but I don’t feel like he’s leading the debate, » said Nick Kounis, economist at ABN Amro in Amsterdam. “His influence in moving markets has certainly diminished, and I wonder if that is also the case within the Board of Governors.”

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The ECB has raised rates twice since July, each time more than initially expected. It is closely monitoring the global monetary tightening led by the United States, after officials in Frankfurt shelved forecasts that, in retrospect, turned out to be extremely optimistic. Inflation over the past quarter was more than triple what officials had expected in December.

Rate hikes are expected to continue, but could be subject to more nuanced judgments as Eurozone growth is crushed by the energy crisis which is fueling consumer prices.

The shift in the dynamics shaping these ECB decisions was relayed by several officials who spoke to Bloomberg anonymously for this story, declining to be identified as internal discussions are confidential.

They describe a landscape in which Lane, 53, is far less influential in determining the outcome than he was in the early years of Christine Lagarde’s presidency at the ECB. He began this as a standard bearer for the accommodating views of his predecessor, Mario Draghi, under whose reign he was appointed.

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When the inflationary shock hit, his central role in shaping policy slipped and is now seen as considerably inferior to that of his predecessors, ranging from Otmar Issing, the ECB’s first chief economist, to Juergen Stark, who radically resigned ten years ago.

Lane remains the most prominent dove of the faction of like-minded officials, but a cast of hawks dominate meetings where Lagarde insists on consensus.

Unlike last year, observers and participants say there is no single policymaker in charge, including the president, who chairs meetings and brokers compromises.

Key players include hawkish national central bankers such as the Bundesbank’s Joachim Nagel and the Netherlands’ Klaas Knot, who push for more aggression and tend to win, along with colleagues from the Baltics and Europe from the east. Board member Isabel Schnabel presents the intellectual case for such action.

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Meanwhile, Lane’s calls for more measured action tend to be pushed aside — an outcome that, in some ways, is arguably quite normal for a central bank with multiple policymakers.

« It’s not very realistic to have so many people around the table agreeing on the magnitude of the upside in such an uncertain environment, » said Marco Valli, an economist at UniCredit. « Achieving unanimity at the end of the debate does not necessarily add to the central bank’s credibility. »

What makes Lane’s position more delicate, beyond the tough economic times, is the paradox of acting as both navigator and passenger on the Board of Governors.

In comments to Bloomberg, the chief economist stressed that the degree of disagreement is not fundamental and that he remains comfortable with his role in the decision-making process.

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“The system works when a proposal makes economic sense and consensus is reached,” he said. “The reality of pricing decisions is that there is always room for more or less to be done in a single meeting. There is no one-size-fits-all answer to evaluating decisions at a single meeting. »

Arguments over tactics such as the size of the hikes and the need to galvanize around an outcome could become even more strained as the discussion shifts to more contentious issues such as the degree of overall monetary policy tightening.

Given this possibility, Lane’s comments raise the prospect that his willingness to accommodate more outlandish political initiatives might have its limits.

« I won’t come up with something I don’t believe in, » he said.

The greater reassurance from the Board of Governors that Lane has encountered reflects a changed environment where runaway inflation has left national central bank chiefs determined to act.

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Some of them rebelled as early as February, when forecasts modeled by his department appeared to have significantly underestimated inflation. The projections are produced by ECB staff, but Lane’s defense of them has baffled some colleagues.

Its grip slipped more dramatically in June as hawkish momentum for rate hikes grew into a juggernaut. The 25 basis point move he had publicly advocated turned into a move twice as big in July.

Lane’s own style of communication, willingly using sophisticated academic language with his mostly non-native English colleagues, may not have helped carry the argument.

By way of illustration, his recent speeches are more difficult for the ordinary reader to grasp than those of other members of the Executive Board, when analyzed with a method similar to that which the former chief economist of the Bank of England , Andy Haldane, applied to communications for his own institution.

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This is not the main issue, however, as officials consider how they will be judged in their overall response to a once-in-a-generation inflationary shock.

For now, Lane appears to accept his diminished influence, accommodating the hawkish consensus while sticking to his own distinct views and still shaping ECB statements.

By keeping this position, he could consider that events could still prove him right from the start. But reaching that point may involve digging a lonely furrow.

“Philip Lane is a brilliant economist,” said Holger Schmieding, chief economist at Berenberg. “What counts at the moment is not so much economic expertise as political mind and intuition. So the perks of a brilliant economist don’t play such a big role anymore – he’s just one person in a group of 25 right now.