How sonic was Lane really? – Commerzbank

ECB Chief Economist Philip Lane also spoke at Jackson Hole. The most important message for the currency market was probably: “The return to the target is not yet certain.” 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 generate chronically below-target inflation over the medium term and be ineffective in minimizing the spillover effects on output and employment” , said Commerzbank’s head of FX and commodity research Ulrich Leuchtmann notes.

There are risks on both sides

“Lanes’s comments would only justify EUR optimism if we were to assume that he considers the first risk (too fast interest rate cuts) to be greater than the second (too high interest rate level). However, Lane’s speech was actually about assessing the effectiveness of monetary policy. The effectiveness is not at all obvious. Perhaps monetary policy makers would be better advised to have more doubt.”

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

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