Lane says bar high for directional rate guidance

The newswires transmitted remarks by ECB official Lane about inflation and the direction of policy.

• The ECB puts a very high value on consensus, so the inclusion of specific dots would be problematic.

• Lane requires a high bar for directional forward guidance at this point.

• Having an instrument to handle multiple equilibriums in the bond market is essential for the ECB.

• It is informative that underlying inflation has not yet moved, indicating the typical delayed reaction.

• Underlying inflation is a guide to the 1-year-ahead inflation rate.

• Energy prices are already reversing; if this continues, headline inflation would decrease while underlying inflation rises.

• Market participants should monitor whether inflation readings exceed or fall short of forecasts.

Assessment

Lane refuses to be pinned down on what the ECB will do with interest rates. For traders, the most telling indicator is whether actual inflation runs ahead or behind the ECB's projections, particularly if the headline and core rates diverge.

Cheaper energy could lower the headline rate even as the past price shock continues to filter into underlying inflation. Lane views the underlying rate as a snapshot of where the overall inflation rate could be twelve months down the line. Should the core reading start beating the projections, a benign headline number alone would not justify the ECB signalling a looser policy stance.