FRANKFURT (Reuters) -The European Central Bank should accumulate data before each interest rate cut given the great uncertainty that surrounds the economic outlook, ECB chief economist Philip Lane said on Thursday.
The ECB has dropped strong hints that it will start lowering its policy rate from a record 4% next month in light of a sharp drop in inflation. But policymakers have been increasingly careful to avoid any commitment beyond that first move.
Lane said the ECB should avoid fuelling “unwarranted expectations” about rate cuts and mentioned the ECB’s economic forecasts, which are published once a quarter, as a reference point.
“(A) robust approach to making rate decisions under conditions of high uncertainty is to avoid pre-commitments or creating unwarranted expectations about the future rate path,” Lane said in remarks prepared for a lecture at the Stanford Graduate School of Business.
“In particular, moving from one meeting to the next meeting and from one projection round to the next projection round allows for the accumulation of further data that can help inform the rate decision.”
His comments were likely to strengthen expectations that the ECB would not cut rates for a second time at its July meeting, waiting instead for its new forecasts in September.
Investors have pared back their bets on ECB rate cuts this year after surprisingly strong inflation in the United States. They now only expect two or three ECB cuts by December, down from four a couple of months ago.
Lane stressed that leaving rates unchanged while inflation expectations were falling implied “a mechanical increase in real interest rates” and the effect of past hikes on the economy was “still unfolding”.
Still, he cautioned the ECB was facing “two-sided risks” as cutting rates too quickly would fail to bring inflation down to its 2% target while being too slow “could push inflation below target over the medium term and incur excessive side effects in terms of sacrificed output, employment and investment”.
(Reporting By Francesco CanepaEditing by Chris Reese and Deepa Babington)
