Philip R. Lane: Interview with Market News

I think for 2023 the teams involved would have to take into account a number of factors.

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https://www.ecb.europa.eu//press/inter/date/2022/html/ecb.in221121~d42a5937c4.en.htmlhttps://www.ecb.europa.eu//press/inter/date/2022/html/ecb.in221121~d42a5937c4.en.html
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Saturday, November 26, 2022
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Summary
Key Points: 
  • I think for 2023 the teams involved would have to take into account a number of factors.
  • And in terms of fiscal policy, it looks like fiscal deficits are wider than foreseen in the September projection.
  • There's been a big jump in the yield curve and it's starting to pass through to bank lending conditions.
  • So for those years the forecast will have to balance the fact that inflation has a knock-on effect, for example, on the wage mechanism.
  • This year weve had a very large increase in the price level, so there's been a very big drop in living standards.
  • And as I said earlier on: it's going to be stronger than the historical average, because workers will be trying to rebuild living standards.
  • But how much and for how long labour costs will contribute to domestic inflation remains open and is a source of high uncertainty.
  • But there is a very important feedback loop here, which is also relevant for the decisions by firms.
  • Firms should be careful about excessively raising mark-ups, and workers should be careful about what a sustainable wage increase is.
  • There is an important interaction between what we do and how these price and wage decisions are set.
  • We said in our recent meetings and we did so again in October that we expect to raise rates further.
  • In December we will make another hike and the scale of it should continue to make progress towards the levels needed.
  • But the more you've already done on a cumulative basis, that changes the pros and cons of any given increment.
  • Clearly, theres a connection: the higher the level of the interest rate, the smaller the remaining gap to the target rate.
  • But the market does expect some degree of runoff of the APP, and that is already reflected in the yield curve.
  • But the labour market has two margins at the moment: one is unemployment, the other is vacancies.
  • I do think, by and large, across all types of surveys and market indicators, people believe that over a longer horizon, inflation will get back to 2 per cent.
  • *Across the euro area, corporate profits are soaring at the same time as an increasing number of households and businesses are struggling.
  • The message here is not so much for those firms but for the firms where mark-ups are currently high.
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