Philip R Lane: The euro area hiking cycle - an interim assessment

Dow Lecture by Mr Philip R Lane, Member of the Executive Board of the European Central Bank, at the National Institute of Economic and Social Research, London, 16 February 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction

It is an honour to deliver this year's Dow Lecture. Christopher Dow had a distinguished career as an applied macroeconomist, both in the United Kingdom (at the Bank of England, the Treasury and here at NIESR) and internationally (as OECD Chief Economist from 1963 to 1973). Moreover, he extensively analysed my topic today – the impact of interest rate movements on the financial system, the economy and inflation – including in the context of the cost-push inflation pressures of the 1970s and 1980s. While the current inflation environment is quite different in many respects – having been driven predominantly by extraordinary external factors such as the COVID-19 pandemic, supply bottlenecks and energy shocks – much can still be learned by re-visiting the analysis by Christopher Dow of the macro-financial dynamics and policy challenges associated with cost-push inflation.

My aim today is to provide an interim analysis of the ECB's current policy rate tightening cycle. I will first describe the projected impact of monetary policy in the range of macroeconomic models maintained by the ECB. Next, I will report on the accumulating evidence about the impact of the policy tightening cycle on the financial system, the economy and inflation. In view of the long and differential lags in the transmission of monetary policy, this evidence is necessarily partial and of an interim nature. Still, it is essential to monitor closely the incoming evidence, since the efficient calibration of monetary policy must take into account the feedback loops between monetary policy, the financial system, the economy and inflation.