Interview with Dagens Industri TV

Interview with Philip R. Lane, Member of the Executive Board of the ECB, conducted by Gabriel Mellqvist on 29 April 2021

29 April 2021

Philip Lane, very nice to have you with us. The first question very broadly: in what shape is the European economy today?

We are very much at an inflection point. Until now, the first weeks of this year, the first months of this year, have really still been dominated by all of the measures we’ve needed to take to contain the virus. As we all know, the services sector in Europe has been very restricted by all of the lockdown measures. On the other hand, manufacturing has been quite resilient in these months because the world economy has been recovering, world trade has been recovering, and there are many European firms benefiting from that. And when we look ahead into May, into the summer, into later this year, with vaccinations now having made progress and more to come in the coming weeks, we will see a lifting of restrictions on the services sector.

So we do see a good rebound. We do see a good recovery throughout the rest of this year, so that is very much, if you like, a two-sided story. Looking backwards, the initial weeks have been very tough for many firms. When looking forward there will be a rebound, but I should say, of course, this is all in the context of this pandemic being a huge negative shock, and the fact we’re rebounding from the worst of it does not mean there’s a full recovery.

That sounds positive and reassuring, but even looking forward on a positive note, it looks like we’re heading into a recession. I believe Lagarde signalled a contraction last week. How much does that matter? Does that obscure the picture of a positive outlook going forward?

That’s what I was trying to refer to in relation to the first months of this year. We do think that the first quarter – which of course ended at the end of March – will have seen a slight contraction. There will have been a fall in output, but we do think the economy will be growing in May and in June, and even more strongly in the third quarter between July and September, with that momentum continuing into the autumn. If you take the whole year, 2021 together, we do think activity will be about 4 per cent above 2020 values. That doesn’t quite recover all of the losses from 2020, but it’s significant progress compared with where we are now.

You are often referred to as the Chief Economist of the ECB; can you talk a little bit about forecasting and making predictions in this very particular environment, with economies going into lockdown? Has it been dramatically different?

It’s definitely been different. But actually, pretty much exactly a year ago the ECB released its first pandemic scenarios. In those scenarios I think the staff did a really good job, because essentially you might focus on this quarter or that quarter, but in the grand scheme of the whole analysis, the central projection was built upon enough medical solutions being in place by summer 2021 that that’s when the recovery would really take hold. And that’s what we’re seeing. That one-year-ago forecast is holding up pretty well: that around now, the European economy would be about 4 percentage points below the pre-pandemic level. That’s broadly where we are, so actually I think we always have to look beyond the week-by-week or month-by-month fluctuation. When we think about looking a year ahead or 18 months ahead, those forecasts made a year ago have held up pretty well.

If you could summarise the crisis management from the central bank so far: any conclusions? Anything you wish you would’ve done differently?

At some point I do agree we should look backwards and really hold ourselves to account. But I think really there were three tasks. The first task was to stabilise markets a year ago, in March and April last year. The initial shock of the pandemic was affecting market stability everywhere and all central banks had to respond with a range of measures. Our second basic objective was to protect credit supply. We know recessions may be far worse if you add a banking problem on top of an economic problem. Through our various measures in monetary policy and supervision, that has so far been handled – banks have continued lending and providing credit, now, of course, with significant support from government guarantees. The third element was to make sure that monetary support, that interest rate policy – which of course these days is not just about the short-term policy rate that we control, but also through asset purchasing – that long-term rates are also low enough to support a recovery and support inflation momentum.

A very common critique against central banks in this crisis has been increased economic division through the crisis. Unemployment is still frustratingly high, while markets have been very, very strong. Any thoughts on this dynamic?

Let me make a sharp distinction: we do think that monetary policy has been very beneficial; I would challenge you in terms of in what way would a tighter monetary policy, would higher interest rates be helpful under this scenario? What is true, and maybe this is where the narrative is complicated, is that the pandemic has definitely been very asymmetric. We’ve seen record earnings this week from all sorts of technology firms, and indeed some investment banking firms. You can see many sectors have been insulated from the crisis, or have even benefited from the move to working from home, while there are so many people, and they’re typically young, disproportionately female, who work in the services sector and who have been burdened with all of the complications from home schooling and so on. So it’s been a very asymmetric recession, but also it’s unprecedented in the amount of fiscal support.

We’ve seen record-breaking fiscal responses to the crisis. I think this is really going to be a big issue for the next year or two. How do we navigate not just the economic rebound, but also the correct sequencing and timing of how all of those policy measures will make sure not just that we have a rebound, but that we have a recovery to a sustainable post-pandemic economy?

In that context, can you talk a little bit about possible market effects on your stimulus and your purchases? Will you also analyse how the corporate bond market, for example, could have been affected or changed by your purchases?

We do think it’s very important and, over time, the evidence is coming in more and more that the corporate sector purchase programme plays a very important role. Let me emphasise: of course it’s important for the large corporates to actually issue bonds. We know that many small businesses, microenterprises, individuals don’t directly participate in the bond market. What that programme does do is, by providing bond market credit for those types of firms, it gives the banks more lending capacity for small firms and for households. So it’s important, when we think about the corporate sector programme, that it should not be a narrow analysis that just focuses on the high-grade corporates who issue bonds, but the fact it has a lot of spill-over effects on the wider credit market and by supporting that type of lending. In fact it opens the door, it creates the space for banks to have a greater willingness and capacity to lend to small firms and to individuals.

Just a quick follow-up. When do you reach a point where you feel uncomfortable at how much of a country’s debt the ECB should own, or of a company’s debt products, say?

We definitely operate within parameters, but I would come back to the basic point: all of what we do has to be assessed compared to the monetary policy imperative. Essentially, all of our tools are calibrated to make sure that we have price stability, which in turn does require us to bring inflation up to a higher level. Below, but close to 2 per cent is our current target. It is very important for the long-term stability of the European economy to reach that target. All of our measures, including the asset purchases, are calibrated to that end. I think that balance is something we always keep in mind. We have a wide range of policy tools and by, if you like, balancing across the different policies we have: the interest rate, the targeted lending scheme, asset purchases and of course our forward guidance about the future calibration of these policies, I think we manage that balance.

Speaking of the balance, I’d say that you’re not so worried about the fear of inflation that’s been tormenting markets lately. Can I also ask you about the inflation target? Do you at all look at an American-style, more average inflation target?

The deeper analysis, which I think the world shares, behind that is essentially that it’s very important in this world where we do have a lower bound on interest rates, where we do have currently low inflation, that everyone concerned should understand that the inflation targets set by central banks are symmetric, that these are not ceilings. One way to make sure that people understand that the centre of the distribution needs to be anchored by the inflation target is that central banks are willing to see inflation not only be below that target but above that target. One way to express that is by emphasising in a flexible way, as the Fed always advertises, average inflation targeting. But actually I think it’s not necessarily the only way and, as you know, we have a strategy review on right now to explore in the European context, in the context of where we are now, which is different from where the Fed is, what the best way to think about our inflation target should be.

Speaking of strategy, I’d like to bring one more central bank into the discussion. The Swedish Riksbank does seem reluctant to go back into negative territory. The ECB has been more comfortable, or at least has been in negative territory for a long time. Any advice or any conclusion from your experience that you would like to share?

I’m sure it’s going to be very unsurprising for you to know that I’m not going to comment directly on the policies of the Riksbank. What I would say is, the Riksbank and the ECB – all the major central banks – we study each other’s policies. We learn from each other’s conditions. Essentially, there is no direct read-across because of course where Sweden is in terms of its inflation momentum is different from where the euro area is. So I would not particularly dwell on any differences across the different central banks. If you look at the conditions we face, Europe faces a condition, the euro area faces a condition where we consider negative rates under current conditions to be essential, to be valuable, to be effective. But of course under other conditions, when inflation momentum is a lot stronger, the reaction may be different. Let me emphasise – I read of course all the Riksbank literature – I don’t think this is a statement that negative interest rates are ineffective. Under the conditions that the euro area faces, we continue to assess that this is an essential and valuable part of our current policy toolkit.

One last question involving the Riksbank: Sweden has been looking at digital currencies for quite some time. More central banks are doing this as of right now. What are your thoughts on central bank digital currencies?

When you see a phenomenon, which is essentially now a global effort to look at it, it’s some combination of being more optimistic that the technologies can be developed. Given our role in the world of payments and how money is exchanged across people, we do think there are potential gains to society from this. Sometimes that’s a bit mysterious because, of course, payment systems work quite well from the point of view of the consumer. But when you look at the overall costs of how payments are made, having a central bank digital currency may actually be something that unlocks efficiencies, reduces costs. Even if those may not be upfront, visible to every consumer, from society as a whole, those efficiencies, those gains may be quite important. It’s important for central banks, if they see possibilities in a safe way, in a stable way, to help make progress in society along this important dimension, I think it’s incumbent upon us to look and study this carefully.