Inflation poses a problem for the new chief economist of the ECB

Philip Lane, of the European Central Bank, begins his first day of work on Monday at a crucial moment for the euro area, as signs of economic weakness reappear and the ability of the bank to fight them is more and more.

Lane, the bank's new chief economist, faces the immediate challenge of preparing for Thursday's monetary policy meeting in Vilnius, where he will present updated forecasts – and may weaken prospects.

In the longer term, he must ask himself if the central bank should abolish its current doctrine to fight years of low inflation.

Lane's predecessor, Peter Praet, cut growth and inflation forecasts in March and some economists are worried that the situation has deteriorated since then, a trend that could be exacerbated by the intensification of American trade war.

The economic gloom comes at a time when staff changes at the top of the bank have sparked debate over new policy measures and the possibility of further stimulus.

Thursday, the ECB should disclose the details of the pricing of its upcoming auctions of cheap long-term loans, and question the need to change its interest rate policy.

But with the departure of President Mario Draghi in October, his potential successors compete for alternative political approaches.

"This is a difficult time for any central bank, especially with the intensification of the trade war," said Anatoli Annenkov, an economist at Société Générale. "There are doubts about what the central bank can do."

Mr Lane, until then Governor of the Central Bank of Ireland, succeeds Mr Praet, become a key ally of Mr Draghi and has supported the use by the President of the ECB of 39, an unconventional monetary policy to fight the crisis in the euro zone.

Established in the euro zone since he became the largest central banker of Ireland in 2015, this soft-spoken economist received his Ph.D. from Harvard and gained a reputation for academic rigor within the board. Governors of the ECB.

The challenge of inflation that Mr. Lane faces at the beginning of his eight-year term becomes increasingly urgent: at 1.3%, the five-year inflation swap rate – a measure market expectations – is well below the ECB's target below but close to 2%.

"As inflation continues to lack convincing signs of an upward trend and lower risks, it is possible that inflation expectations will be slightly downgraded. [on Thursday]"Said Ryan Djajasaputra, an economist at Investec. "Such a result could incite the [ECB governing council] to ask whether an adjustment of the policy is necessary. "

If inflation remains low, it will be up to Lane to shape the bank's intellectual response at a time when central banks are under severe threat.

Adam Posen, of the Peterson Institute, recently said in a farewell to Mr. Praet that central banks were increasingly threatened, not only by right-wing populist attacks against their independence, but also by "a weak interest rate, a low investment and a low risk environment. . . in which we can not seem to have inflation. "

The ECB is "particularly vulnerable" because of "the incomplete monetary union in Europe," added Posen.

Lane can use a range of policy options broadened by his predecessor, and ECB officials say the bank still has room to inject further stimulus. The ECB's commitment to price stability, enshrined in European Union law, obliges the bank to further reduce rates or to relaunch the extension of quantitative easing – under which the bank has already bought bonds worth € 2.6 billion – in case of persistent weakness.

Lane said in the past that the reason why inflation continued to fall short of the bank's target was that the economy of the region was still recovering from the crisis and he remained convinced that prices would intensify as companies raise their prices. But it is thought that he shares the views of MM. Praet and Draghi that the bank could do more to clarify that it is just as serious to bring inflation back to the 2% target set by the ECB as to maintain price pressures at the below this threshold. level.

For example, the US Federal Reserve is willing to accept inflation slightly above its target rate.

Greg Fuzesi, of JPMorgan, warned that the "apparent tolerance of the ECB vis-à-vis a permanent and insufficient inflation". . contrast with the Fed's adoption of a makeup strategy that tolerates inflation above the end of the economic cycle. "

Two of Draghi's presidential candidates this autumn, former Bank of Finland governor Erkki Liikanen and incumbent President Olli Rehn both said the country's monetary guardian the euro zone should be ready to tolerate an inflation period of over 2%.

"You need new ideas," said Annenkov. "And that should start with a review of the current strategy. A sharper symmetry around 2%, as discussed in the United States, would certainly apply to Europe as well. "