Lane: rising long-term yields slow the euro area and on their own lower inflation
Serguey Asael Shinder2 min readThe ECB published on 6 October an interview with Executive Board member and chief economist Philip R. Lane, conducted by Domenico Conti of the Italian news agency Ansa on 1 October.
Long-term yields. Lane said the ECB treats broader financial conditions, including long-term interest rates, as an important input to monetary policy. "An increase in long-term interest rates, especially if it's driven by external, global factors more than European factors, slows down the European economy and, on its own, reduces the inflation rate," he said; that "will be in the mix" with the inflation and risk analysis in setting the policy rate. He pointed to a new wave of increases after the step up from early 2022, and said the ECB would watch its bank lending survey and firm surveys for effects on investment and employment.
The biggest risk. Asked to single one out, Lane named AI. It has made world trade strong this year, including in chips, with European firms part of the supply chain, but US AI investment also means firms are raising a lot of long-term debt, which he cited as one factor behind higher yields.
The energy shock. Energy prices are higher than in the ECB's baseline, Lane said, but it is "too simplistic" to say the economy is in the adverse or baseline scenario. "We have not seen, so far, very strong second round effects." He described the energy shock as the main driver of the ECB's interest rate decisions, and the economy's resilience as meaning that the downside risk to activity has not materialised so far.
Fiscal policy. Lane noted fiscal support this year from Germany's infrastructure and defence programme and the final year of Next Generation EU, which ends this year, so fiscal support in 2027 and 2028 will differ. Support for people on low incomes should be "as targeted as possible", he said, because broad-based fiscal support adds to demand and "is not going to help inflation return to 2 per cent in a timely manner".