TRANSCRIPT: Interview with ECB Governing Council member Scicluna on 01 October 2021

6 October 2021

By David Barwick – VALLETTA (Econostream) – Following is the full transcript of the interview conducted by Econostream on October 1 with Edward Scicluna, Governor of the Central Bank of Malta and member of the Governing Council of the European Central Bank:

Q: Many analysts expected the 2023 HICP projection to be hiked from 1.4% to 1.6%, if not 1.7%. The ECB only went to 1.5%. It's easy to think that the ECB worries about being interpreted too hawkishly and thus makes a choice in favour of weaker projections. How do you see this?

A: The projections are done by the staff of the ECB, and they are quite scientific. Like all scientists, they are answerable to the divergences of their projections from the actual outcomes. In my nine months of experience, governors don’t push or pull as far as the projection figures are concerned. We might show surprise at individual outcomes and be critical in a constructive manner – “Have you taken that into consideration?” and that sort of thing. But I would be surprised if anyone was intentionally underestimating or doing anything not to get the most accurate forecast. A few weeks ago, the staff projections were saying that this would be a short-lived bout of inflation, but this wasn’t because of some particular stance. In December, we will update the projections.

Q: You mentioned that individual outcomes can surprise. Was this one such occasion for you as far as the 2023 HICP projection goes?

A: Well, the staff convinced us that this outcome was temporary due to food, energy, supply bottlenecks and so on not being a permanent source of price pressures. Because after all, inflation is a general price increase reflecting long-lasting pressures and affecting expectations. And staff’s reading of the situation at the time of the last projections was that the inflation spike was a short-term development. However, during this short period, it’s clear that inflation is going to shoot up beyond 2%. There’s no secret about this. But the factors that are contributing to this will not continue, unless – and this is what we discussed on the Council – they affect inflation expectations in a permanent manner. In this instance, which is quite unique, we’re talking about a pandemic that had a devastating effect on unions, households, companies. How are they going to react to this inflation increase? Unions want to maintain jobs and so at least initially are quite cautious. Will they remain cautious? We don’t know. The same goes for households. We can reassure them at first that it’s just a short-term development, but when they go to the supermarket day in, day out, then like my wife they wind up saying, “Look, I don’t care what you say, prices are going up.” And the salary earners may give their employers a nudge and say, “I can’t cope anymore at my current salary.” So this is how households could eventually react. And then there’s the companies; will they absorb the losses for a while longer rather than raise prices? It depends also on the industry. I notice that in the restaurant sector it looks very much like they’re trying to compensate for the losses they suffered over the last year, and they’ve really raised prices. So, what I mean is that the reaction of households, companies and unions is quite important, and that is very difficult to include in a model. And in the Council discussion, I suggested that we should listen more and do more surveys, because the findings could be useful in the sense of giving a bit more depth to our mathematical projections. Everyone agreed to the importance of closer monitoring, because we just don’t know what reactions to expect from economic agents.

Q: Do you tend in one direction or the other with your expectations?

A: We will soon be updating our projections again, and that’s when we will say, “Oh, wait a minute, this is not how we were seeing it now”, or “Yes, this confirms our view.” I’d rather wait and see than speculate.

Q: With respect to cliff effects, would you agree that an acceptable way to minimise these is by extending the PEPP one, maybe two quarters and progressively reducing the purchase volumes such that the envelope is exhausted but does not need increasing?

A: Both on the fiscal side and on the monetary side, authorities definitely need to be watchful of cliff effects, because this is a classic case of policy going all out and then having to normalise. We need to avoid cliff effects. But at the ECB we have considered these, and although the word “tapering” is not in our vocabulary as yet – and I will explain why – we have given the pandemic emergency purchase programme a deadline, so to speak, in terms of when it will end, and defined net purchase volumes going forward. So, it’s not that we have not considered avoiding these cliff effects. Now, people were expecting the word “tapering”, meaning not stopping, but gradually reducing. We have avoided that, not because we are not for gradually reducing, but because we don’t want to commit yet to a programme to end the PEPP. We’ll do that in December. And that’s the interpretation to be given to our preference for calibration rather than tapering. When we announced it, we hadn’t yet seen the necessity of a programme of tapering, with a clear beginning and end, without hesitating or reversing course. In December we’ll be very explicit based on updated projections. But I hesitate to speculate on what we will do.

Q: Is there a possibility that the Governing Council will wind up making the decision later than December? At one point during her European Parliament Q&A on Monday, Lagarde said that “these matters will be reviewed in due course in probably late ‘21, early ‘22.”

A: That’s an even stronger reason why we should decide in December. The onus is on us to give it all our energy to decide at that point, and my feeling is that in December we’ll consider the updated outlook and announce something significant. We owe financial markets some form of meaningful and significant statement at that point. It would be unfortunate if we did not manage to do so, but of course I don’t know what will happen between now and then. One week is a long time in politics, and in monetary policy it’s no different. So many things can happen between now and December.

Q: And the statement will address what happens to the PEPP, but also what happens to the APP, because the two are linked in a way.

A: Yes, we will take stock of everything in December, and it is unlikely that we will say, “Let’s leave it until February.” Our main concern is the PEPP, because we want to see the pandemic behind us. Obviously, we have to address the APP in due course as well.

Q: How much of the PEPP’s flexibility needs to be transferred to the APP?

A: It’s not so easy to answer that. Certain countries would mount legal opposition to a flexible APP. The PEPP’s emergency flexibility was allowed because it was a pandemic; I wouldn’t think that it would be an easy thing to agree on in a non-emergency. Especially with the new strategy and its symmetrical 2%. So, it’s not just pushing up, up, up, but also taking into consideration that after such a long time near the lower bound, upon exceeding 2% you wouldn’t immediately say, “Okay, we are there.” We discussed this during a retreat for a very long time, and we reached consensus that we will not react immediately, but will wait to see that it is anchored before taking action.

Q: You’re referring to the “transitory period in which inflation is moderately above target”.

A: Yes. That wording was very cautiously selected, I can assure you. There were a lot of revisions before we agreed on the best wording. How to address the symmetry? It is symmetry in turns of the target, but not in terms of the reaction or effort. We didn’t use the word, but it is like an asymmetric way of pushing from the lower end after a very long period there. We have to make doubly sure that we have reached or exceeded 2% in a permanent fashion.

Q: And does the use of different wording during the discussion have any implication for how all this is understood internally?

A: Like any other case of brainstorming, during the retreat we went through different versions until we reached consensus on a wording that everyone agreed to and which accurately reflects our policy intentions.

Q: Does the attention being paid to the possibility that upside price pressures could turn out to be more persistent than expected seem sudden to you?

A: I’m awaiting updates of our forecasts to find out what has changed. We’re having meetings with the corporate sector both nationally and at the European level of Europe, and I’d like to know how they perceive things. Are all these supply constraints involving shipping, cargo handling, chips and now gas supply issues long-term? Our concern is their reaction. We want to know if unions are going to behave like unions used to under circumstances of falling unemployment. It’s a tight labour market and you would normally be surprised if wages didn’t go up in response, but is it like old times, or is this a special case? What can be expected, with the pandemic in its throes? I want the ECB to do its homework and then I want to learn from that. Because inflation expectations are important; they do contribute to price pressures. So, what matters now is the reaction to inflation developments, and I am all ears and eyes to see whether economic actors are going to contribute to inflation or not. This is crucial for whether the current increase in inflation will be a short blip, a longer blip or a permanent development.

Q: You mentioned a moment ago that the pandemic was in its throes. Is it time to declare the crisis phase of the pandemic over?

A: It’s a mixed bag. We have three groups of countries. There are those that are really advanced in terms of vaccination, like Iceland, Malta and Israel. Then, Europe has made big steps forward, even if there are still issues in getting to herd immunity, but we have some countries with only 30% or 40% immunisation. Projecting their outcome is very difficult. And then there are the emerging market economies with very low vaccination rates. In a global world where we want globalisation to continue where it left off, so to speak, you’re not yet there. However, when we talk about the crisis phase, I believe that we have learnt a lot and won’t react in knee-jerk fashion to every statistic. The key statistic should be critical cases in the hospital. Because that’s what requires special equipment and leads to mortality, and so it’s the statistic that motivated complete lockdowns. So, we’re not out of the woods yet, as President Lagarde said. We’d be out of the woods if all countries had achieved herd immunity. And we’re affected by the rest of the world; what’s the use of normal in Europe if you can’t go to Africa? But I wouldn’t speculate on another wave or not. It’s more under control than it was, definitely. We’ve made big strides. Everybody’s still cautious, but you can tell that gradually, it is moving towards normalisation.

Q: And when will we get a declaration from the ECB, formal or otherwise, that the crisis phase is over?

A: There have been reports recently of consumer activity being back at pre-pandemic levels. For me this was a surprise. 2019 was a peak year for consumption. That same statement is not yet reflected in production, especially in the automotive industry. So we’re just not there yet, even if it’s surprising and comforting and enjoyable to read that consumption has reached 2019 levels. We’d like to see that across the whole economy.

Q: On another topic, Philip Lane was reported to have said that the ECB's longer-term inflation outlook suggested the achievement of price stability by 2025. Does it sound reasonable?

A: The achievement of price stability by 2025 would be something the whole Governing Council would look forward to. Until the pandemic, nobody would have thought that inflation would jump up to 2% anytime soon. Now it has happened, whether it is short-term or not. So, while households may be worried, at the ECB and I believe also at the Fed, we are not going around screaming, “Look what’s happened!” In fact, this is something we’ve been looking forward to. We want inflation to be anchored around 2%, give or take. So, it could be possible, yes, of course, that we achieve price stability by 2025.

Q: When the PEPP comes to an end, what would you say could justify including Greek debt in the APP?

A: As one would expect, there will definitely be mixed views on including Greek debt in the APP. I think the experience of PEPP will colour the discussion. I mean, we’ve had the experience now of applying a waiver, and something that was not allowed normally was allowed during the emergency. But we cannot ignore that. And we need to see what impact it had. I’m not pointing to any particular outcome, but it’s not the same as asking for a waiver without having had the experience of the emergency.

Q: So you would view Greece’s desire to include Greek debt in the APP with some sympathy?

A: Yes, I would, you can’t ignore our recent experience. But I would want as well to listen to whoever has a technical explanation of the negative implications, if any, and of the risks the decision might involve.

Q: How do you see yourself in terms of hawkishness/dovishness?

A: Pragmatic fits better. Malta never had the trauma that Germany had with inflation. So, I can’t compare myself to Germany, where, relatively speaking, they are scared stiff of inflation. At the same time, our inflation has always been very moderate, and unlike other Mediterranean countries, we did not follow policies of high inflation and exchange rate devaluation in the three decades after the collapse of the Bretton Woods agreement in 1971. The Maltese lira was fixed to a very stable basket of currencies, and that kept our inflation very moderate and our currency very stable. When we joined the euro, we were the country with the highest exchange rate – about 2.3 euros for every Maltese lira. It was very much the opposite case for the Spanish peseta, the Italian lira or the Greek drachma. They had been devaluing to compensate for their high inflation, whereas our situation was different. I mention this because very often, we classify people as hawkish or dovish based on their country’s historical and current experience. But sometimes I find myself sympathising with the hawkish point of view, and sometimes with the dovish group. So, where do I stand? As I said, pragmatic fits me better.

Q: What should we look forward to from the October Governing Council meeting, given the big decisions won’t come until December?

A: I would see the governors coming with increased concern about inflation. We’re always updating ourselves and our understanding. But I can’t speculate about what will be the outcome.

Q: Maltese inflation is low but stably positive and at the same time, seasonally adjusted unemployment is low and getting lower. Given this experience, does it make you comfortable with low inflation?

A: Malta benefits from a highly elastic supply of foreign labour both from the EU countries and elsewhere. Inflation would increase in line with the EU’s but not because our labour market is currently somewhat tight.

Q: Will the discussion that is to lead to decisions in December actually commence in October?

A: Normally our discussions are based on solid macroeconomic projections, and we won’t have these until December. Of course, there will be other presentations.

Q: Non-voting Council members in December are relatively hawkish. Might this affect the outcome?

A: That’s an easy one. Unlike the European Parliament, where I was in my previous life, we don’t have any electronic buttons in the Council, so we are always seeking consensus. There can be disagreements, but we continue honing in on common ground so as to get as much consensus as possible. So, in my experience, we don’t actually vote. But since it will be a tour de table, everybody will be able to express an opinion, and it will be obvious which opinions are for and which against. I’m sure someone will be keeping a tally. But I have found that President Lagarde is always encouraging consensus. So, in truth we don’t need to find out who has or who hasn’t a vote. Legally that is how it should be, but in actual fact not. That’s my experience so far.

Q: How optimistic are you that supply constraints will be resolved reasonably soon?

A: For world trade to succeed and normalise, we need all countries to normalise, and we’re not there yet. The risks are there, the uncertainty is there. Is it a matter of months or years? It adds to the uncertainty, and that is what’s keeping alive, again, this question of tapering. Looking at the quickening pace of normalisation, one would want to go for a programme of tapering, because it looks like things are fine, but at the same time, one hesitates and wants to give oneself the benefit of being able to stop and maybe rethink. So it’s not clear. There are always these issues niggling and creating uncertainty.

Q: My overall impression is that you’re not too optimistic.

A: I would say cautiously optimistic.