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ECB’s Lane flags possible rise in underlying inflation as energy prices decline
If energy prices ease, “headline inflation could fall while underlying inflation rises,” according to European Central Bank (ECB) Chief Economist Philip Lane. Speaking at the Bank of England and its Watchers Conference, he also said that “it would be a surprise if there are no second-round effects,” outlining his assessment of inflation pressures.
On policy communication, Lane said he would set a “high bar on directional forward guidance now.” He also stressed that the ECB places a “very high premium on consensus” within the Governing Council.
Lane outlines the main policy considerations:
Consensus carries a very high premium for us; a dot plot would make that difficult.
For now, I would set a high threshold for directional forward guidance.
Having an instrument to address multiple equilibria in the bond market is important for the ECB.
The fact that underlying inflation has yet to move is informative: it points to the usual delayed response.
Inflation 1 year ahead can be gauged using underlying inflation.
The reversal in energy prices is already under way; a continuation could bring headline inflation down even as underlying inflation increases.
An absence of second-round effects would be surprising.
Euro Performs Most Strongly Against Australian Dollar Today
Against the Australian dollar, the euro recorded its strongest performance today. The table below sets out the euro’s (EUR) percentage movements against the major currencies listed.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.53% | 0.75% | 0.56% | 0.50% | 0.89% | 0.53% | 0.74% | |
| EUR | -0.53% | 0.21% | 0.02% | -0.02% | 0.36% | 0.02% | 0.21% | |
| GBP | -0.75% | -0.21% | -0.19% | -0.21% | 0.14% | -0.22% | -0.00% | |
| JPY | -0.56% | -0.02% | 0.19% | -0.04% | 0.34% | -0.02% | 0.19% | |
| CAD | -0.50% | 0.02% | 0.21% | 0.04% | 0.38% | 0.02% | 0.23% | |
| AUD | -0.89% | -0.36% | -0.14% | -0.34% | -0.38% | -0.36% | -0.15% | |
| NZD | -0.53% | -0.02% | 0.22% | 0.02% | -0.02% | 0.36% | 0.20% | |
| CHF | -0.74% | -0.21% | 0.00% | -0.19% | -0.23% | 0.15% | -0.20% |
To read the heat map of percentage movements between major currencies, select the base currency in the left-hand column and the quote currency in the top row. Selecting the euro on the left and following its row across to the US dollar, for instance, gives the percentage change for EUR (base)/USD (quote) in the corresponding cell.
ECB Policy and Its Impact on the Euro
Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the eurozone’s reserve bank, setting the region’s interest rates and conducting its monetary policy. Maintaining price stability is the ECB’s principal mandate, which means keeping inflation at around 2%. Changes in interest rates are its main means of meeting that objective. Higher relative interest rates generally strengthen the euro, while lower relative rates tend to have the opposite effect. Monetary policy is decided by the ECB Governing Council, which meets eight times a year. The decision-makers comprise the heads of the eurozone’s national banks and six permanent members, among them ECB President Christine Lagarde.
When conditions are extreme, the European Central Bank can turn to Quantitative Easing (QE). Under this policy, the ECB prints euros to purchase assets from banks and other financial institutions, typically government or corporate bonds. The euro usually weakens as a result. As a last resort, QE is used when interest rate cuts alone are unlikely to deliver price stability. The ECB deployed it during the Great Financial Crisis in 2009-11, again in 2015 as inflation stayed persistently low, and during the Covid pandemic.
Once an economic recovery is under way and inflation begins to pick up, Quantitative Tightening (QT) reverses the earlier process of QE. Under QE, the European Central Bank (ECB) supplies liquidity to financial institutions by buying their government and corporate bonds. With QT, by contrast, it ceases further bond purchases and no longer reinvests the principal repaid as its existing holdings mature. The effect on the euro is usually positive, or bullish.
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