ECB Insight: Governing Council Neatly Split on Question of Lift-Off Timing; Data Will Tell
14 February 2022
By David Barwick – FRANKFURT (Econostream) – To facilitate consideration of the question of whether the European Central Bank will initiate a hiking cycle this year, we have grouped 22 members of the Governing Council based on their apparent desire to see this occur.
Although the Council counts 25 members, at least for the time being we omit from consideration three, owing to the dearth of relevant and recent comments from them: Executive Board member Frank Elderson, Central Bank of Cyprus Governor Constantinos Herodotou and Central Bank of Malta Governor Edward Scicluna.
While our grouping of the remaining 22 does not pretend to be a precise ranking of eagerness to lift off, those towards the top have been clearest in calling for rate hikes in 2022, while those towards the bottom have been least secretive about their preference to go slow.
For each member, we include a relevant quote that we think is indicative of the member’s thinking.
Our classification suggests that as of now, the 22 Council members are split 10:10 between, on the one hand, those clearly in favour of as well as those probably leaning towards a 2022 lift-off, and, on the other hand, those clearly or probably leaning against a 2022 lift-off. Two particularly data-dependent members are in the middle (‘particularly’ because we realise that incoming information matters for all members of the Council).
Various caveats would be appropriate here, but we limit ourselves to two. In general, we think there may be a certain asymmetry of data-dependence. Specifically, we think that all of those probably leaning against a 2022 lift-off, and maybe even some of those clearly against the idea, could fairly easily take a different view of things given another couple of surprisingly strong HICP readings.
In contrast, we suspect that it might take a bit more doing for their colleagues who are probably leaning towards a 2022 lift-off, and certainly those clearly in favour of one, to abandon their predilection.
Another asymmetry has to do with the position of the individual members. Clearly, President Christine Lagarde and Chief Economist Philip Lane exert relatively more influence than any other randomly chosen pair of Council members, and both are in camps sceptical of an earlier lift-off.
The clearer the story told by data that come in between now and the date of a possible move, the less any of that will matter. For now, and despite elevated uncertainty, it is clear that different Council members have fairly well-formed preferences, and we try to identify these as a potential guide to how and when policy could evolve:
Clearly in favour of a 2022 lift-off:
Dutch National Bank Governor Klaas Knot on 06 February 2022: ‘I expect the first [rate] step this year, and then I would expect a second step sometime in the spring of '23, say.’
Bundesbank President Joachim Nagel on 09 February 2022: ‘If the picture does not change by March, I will advocate normalising monetary policy. The first step is to end net bond purchases in the course of 2022. Then interest rates could rise this year.’
Austrian National Bank Governor Robert Holzmann on 24 January 2022: ‘There is a lot to be said for saying, especially if inflation is high again in March and especially in June, that’s it, we will stop in three months' time and then initiate interest rate steps. And I have already tried to put a bit of pressure on and said that interest rate steps can also be taken before the programmes expire.’
Probably leaning towards a 2022 lift-off:
Eesti Pank Governor Madis Müller on 17 December 2021: An expectation of policy normalisation ‘is already reflected in financial market expectations that the ECB could start raising interest rates in early 2023. … we are also prepared to tighten monetary policy more rapidly...’ On 04 February 2022: ‘All indications are that it is time to move in a clear direction to reduce the European Central Bank's support for economic recovery.’
Latvijas Banka Governor Mārtiņš Kazāks on 06 January 2022: Ending asset purchases by end-2022 and raising interest rates in early 2023 is a ‘possible scenario’, though the ECB should avoid ‘rocking the boat.’ On 07 February 2022: ‘July would imply an extremely and unlikely quick pace of tapering. … If we see that inflation remains high and the labour market remains strong or strengthens further, if we see that the economy keeps going, the direction is clear: we may act sooner than we assumed in the past.’
National Bank of Slovakia Governor Peter Kažimír on 04 February 2022: ‘The fact that we have not tightened despite the surprises of the December and January inflation figures does not mean that we will delay the reaction.’
Central Bank of Ireland Governor Gabriel Makhlouf on 13 February 2022: ‘The idea that we could hike interest rates in June looks very unrealistic to me. I certainly think there’s a bit of difference between the calendar we’re working to and the one some market participants may have in mind. … I’m reasonably confident net asset purchases will end this year. The question is what is the pace at which my foot sits on the accelerator, and am I talking about June or am I talking about the third quarter.’
ECB Executive Board member Isabel Schnabel on 09 February 2022: ‘Raising rates would not lower energy prices. But if high current inflation threatens to lead to a de-anchoring of inflation expectations, we may still need to respond, as our mandate is to preserve price stability.’
Central Bank of Luxembourg Governor Gaston Reinesch on 11 February 2022: ‘[I]t would not be entirely groundless to consider that the end of net asset purchases under the current APP could come sooner than might have been expected on the basis of the December assessment and the related monetary policy statement.’
Banka Slovenije Governor Boštjan Vasle on 04 February 2022: ‘Rising energy prices and continuing bottlenecks in supply chains suggest that price growth, although expected to slow further over the course of this year, could persist at elevated levels for longer than expected. Although the main contributors to high inflation continue to be strong energy price inflation, broader inflationary pressures also remain elevated.’
National Bank of Belgium Governor Pierre Wunsch on 26 January 2022: ‘We need to see whether in the coming months there is indeed a decrease in inflation, or whether current levels last a bit longer than expected. If over the next quarters we have inflation surprises on the upside, then we may need to consider reacting faster. But I’m really fine with waiting to see where inflation is going before we get nervous. Again, if we look at core inflation today, and take into account base effects and energy prices, we are close to target. Over a one-year horizon, it’s not like we are wildly overshooting our goal and that the situation is not under control.’
Bank of Finland Governor Olli Rehn on 04 February 2022: ‘Barring a backlash in the pandemic or geopolitical situation, it would be logical for the ECB to raise interest rates next year at the latest.’ On 12 February 2022: ‘If we reacted strongly to inflation in the short term, we would probably cause economic growth to stop. It’s better to look beyond short-term inflation and look at what inflation is in 2023, 2024.’
Probably leaning against a 2022 lift-off:
Banque de France Governor François Villeroy de Galhau on 10 February 2022: ‘It’s clear that we will have a sequencing in the gradual normalisation of our monetary policy. … The road, the direction is very clear; the pace along this sequencing is completely open and data-dependent. This is what we mean by optionality. And it would be a mistake in such uncertain time to make a premature decisions.’
ECB Vice President Luis de Guindos on 30 November 2021: ‘[W]e make it clear that we will start increasing our rates shortly after we have ended our net asset purchases. … I’m confident that those net purchases will continue throughout next year. Beyond that, I don’t know.’
Bank of Lithuania Chairman of the Board Gediminas Šimkus on 26 January 2022: ‘There is uncertainty, and I agree it has increased. But I don’t have evident facts that the projections have changed so substantially that we should start discussing whether the inflation outlook has changed to one that’s far beyond our 2% objective.’
Banco de Portugal Governor Mario Centeno on 16 January 2022: ‘If inflation in two years' time is below 2%, we don't have to react in advance to that increase. This is not to say that we do not want a normalisation of monetary policy, but to ensure that the conditions have been created so that the stimulus of the asset purchase programmes can be reduced and that in a subsequent phase there will be interest rate hikes.’
ECB President Christine Lagarde on 10 February 2022: Hiking interest rates ‘would not solve any of the current problems. On the contrary: if we acted too hastily now, the recovery of our economies could be considerably weaker and jobs would be jeopardised. That wouldn’t help anybody.’
Clearly against a 2022 lift-off:
ECB Chief Economist Philip Lane on 11 January 2022: ‘The data we have, make it quite unlikely that the criteria we set to raise interest rates will be fulfilled this year.’ On 07 January 2022: ‘Yes, [that it is highly unlikely that interest rates change in 2022] remains the case.’
Banca d’Italia Governor Ignazio Visco on 12 February 2022: ‘The unexpected increase in inflation recorded in the euro area in the last few months is largely the result of a supply-side shock. If no wage-price spirals are triggered and if expectations remain firmly anchored to the ECB’s inflation objective, as is happening at the moment, the effect of the energy price rises will mostly be reabsorbed in 2023. As the recovery consolidates, a gradual normalisation of monetary policy therefore remains the most appropriate strategy.’
Bank of Greece Governor Yannis Stournaras on 24 January 2022: ‘The European Central Bank is not going to tighten monetary policy … Even yesterday Mrs Lagarde made statements and said: "Don't expect the European Central Bank to raise interest rates this year". I absolutely agree.’
ECB Executive Board member Fabio Panetta on 24 November 2021: ‘[S]o long as higher short-run inflation does not feed into inflation expectations and wage and price-setting in a destabilising way, monetary policy should remain patient. We should not exacerbate the risk of supply shocks morphing into a demand shock and threatening the recovery by prematurely tightening monetary policy – or by passively tolerating an undesirable tightening in financing conditions.’
Banco de España Governor Pablo Hernández de Cos on 20 January 2022: ‘With the conditions we have today, including the inflation forecasts ... an increase in interest rates in 2022 is not to be expected.’ On 12 January 2022: ‘It is in this sense that our statement should be understood that, if today's conditions regarding the evolution of core inflation and inflation expectations hold, we do not expect rate hikes in 2022.’ On 20 December 2021: ‘… three conditions must be met for there to be an increase in interest rates and it is clear that, at the present time, these conditions are not met in 2022. On 29 November 2021: ‘… it is unlikely that we will see rate hikes in the coming year, even for some time afterwards, since, based on the information and analysis available to us, it does not appear that the prerequisites ... for a rate hike over that horizon will be met.’