European Central Bank chief economist Philip Lane has spent much of this year losing the argument over rapid interest-rate hikes that his colleagues have demanded, and he might need to get used to it.
It’s the job of the dovish former Irish Central Bank governor to propose changes in borrowing costs, and yet his recommendations are often seen to be catching up to hawkish demands for bigger moves than the steady pace he favours.
That means a pivotal policymaker, who used to be treated by investors as the key Governing Council member to watch, is having to redefine his role as he effectively follows his colleagues’ lead in crafting the most aggressive monetary tightening in ECB history.
“He might be the chief economist, but I don’t have a sense that he’s driving the debate,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “His influence of moving markets certainly has gone down, and I wonder if that’s also a case in the Governing Council.”
The ECB has raised rates twice since July, each time more than initially flagged. It trails US-led global monetary tightening, after Frankfurt officials set aside forecasts that hindsight shows to be wildly optimistic. Inflation in the past quarter was more than triple what officials projected in December.
Rate hiking is likely to continue, but may feature more finely balanced judgments as euro-zone growth gets crushed by the energy crisis that is stoking consumer prices.
The shift in the dynamic shaping such ECB decisions was relayed by multiple officials who spoke anonymously for this story, declining to be identified because internal discussions are confidential.
They describe a landscape in which the 53-year-old Lane is far less influential in determining outcomes than he was in first years of Christine Lagarde’s presidency of the ECB. He began that as the standard bearer of the dovish views of her predecessor, Mario Draghi, under whose reign he was appointed.
As the inflation shock hit, his central role in defining policy slipped and is now seen as considerably less than those of predecessors ranging from Otmar Issing, the ECB’s first chief economist, to Juergen Stark, who dramatically quit a decade ago.
Lane remains the most prominent dove in the faction of officials sharing his views, but a cast of hawks sway meetings where Lagarde insists on consensus.
Unlike last year, observers and participants say there’s no single policymaker in the driving seat — including the president, who chairs meetings and brokers compromises.
Among key players are hawkish national central bank chiefs such as Joachim Nagel of the Bundesbank and Klaas Knot of the Netherlands, who push for more aggression and tend to win, together with colleagues from Baltic and eastern European countries. Executive Board member Isabel Schnabel articulates the intellectual case for doing so.
Meanwhile Mr Lane’s calls for more measured action tend to be set aside — an outcome that, in some respects, is arguably quite normal for a central bank with multiple policymakers.
“It’s not very realistic to have that many people around the table agreeing on the size of the hike in such an uncertain environment, said Marco Valli, an economist at UniCredit. “Reaching unanimity at the end of the debate does not necessarily add to the credibility of the central bank.
What makes Mr Lane’s position trickier, beyond the challenging economic juncture, is the paradox of acting both as navigator and passenger within the Governing Council.
In comments to Bloomberg, the chief economist stressed that the degree of disagreement isn’t fundamental, and that he remains comfortable with his role in the decision-making process.
“The system works when a proposal makes economic sense and a consensus is reached,” he said. “The reality of rate decisions is that there’s always a case of doing more or doing less in any single meeting. There is no unique answer to rate decisions in a single meeting.”
Arguments on tactics such as the size of hikes, and the need to galvanise around one outcome, could yet become more fraught as the discussion moves on to more contentious matters such as how much to tighten monetary policy overall.
Given that possibility, Mr Lane’s comments raise the prospect that his willingness to accommodate more outlandish policy initiatives might have its limits.
“I won’t propose something that I don’t believe in,” he said.
The greater assertiveness of the Governing Council that Mr Lane has encountered reflects a changed environment where rampant inflation has left national central bank chiefs determined to be seen to act.
Some of them rebelled as early as February, when forecasts modelled by his department looked to have drastically underestimated inflation. The projections are produced by ECB staff, but Mr Lane’s defence of them baffled some colleagues.
His grip most dramatically slipped in June as hawkish momentum for rate hikes became a juggernaut. The 25 basis-point move he had publicly advocated morphed into one of twice the size in July.
Mr Lane’s own style of communication, happily using sophisticated academic language with his mostly non-native English colleagues, may not have helped carry the argument.
As an illustration, his recent speeches are harder for ordinary readers to grasp than those of other Executive Board members, when analysed with a method similar to one that former Bank of England chief economist Andy Haldane applied to his own institution’s communications.
That isn’t the main issue though, as officials consider how they will be judged in their overall response to a once-in-a-generation inflation shock.
For now, Mr Lane seems to be accepting his diminished influence, accommodating the hawkish consensus while sticking to his own distinct views and still moulding ECB statements.
In keeping to that position, he might consider that events could still prove him right all along. But reaching that point may involve ploughing a lonely furrow.
“Philip Lane is a brilliant economist, said Holger Schmieding, chief economist at Berenberg. “What matters right now is not so much economic expertise but political wit and gut feeling. So the advantages of a brilliant economist no longer play such a big role — he’s just one person in a group of 25 right now.” — Bloomberg
