ECB Insight: Governing Council Still Split on Timing of a Lift-Off, But Momentum up for 2022

22 February 2022

By David Barwick – FRANKFURT (Econostream) – Having done a first review last week of European Central Bank Governing Council members’ individual inclination to initiate a hiking cycle this year, we now repeat the exercise in light of relevant comments made since then.

Some of the new comments were, unusually, made by Central Bank of Cyprus Governor Constantinos Herodotou, whom we had entirely omitted from consideration on account of a deficit of public statements facilitating an assessment. We are now happy to include Herodotou, but continue to disregard Executive Board member Frank Elderson and Central Bank of Malta Governor Edward Scicluna for lack of data.

As before, our grouping of the 23 Council members considered is no perfect hierarchy of hiking desire, but 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.

Although we have put Herodotou in the group of those probably leaning against a 2022 lift-off, we have ‘upgraded’ Latvijas Banka Governor Mārtiņš Kazāks from the group of those probably leaning towards a 2022 lift-off to the group of those clearly in favour of one, based on new comments from him.

We were tempted to do the same with ECB Executive Board member Isabel Schnabel, whose most recent statements make clear that she would advocate normalising monetary policy in general. However, she has avoided specifically suggesting that rates lift-off should or would occur in 2022, so we leave her in the category of those probably leaning in that direction.

Another change regards Banque de France Governor François Villeroy de Galhau, whose latest remarks motivated moving him to the group of those we consider particularly data-dependent. Previously he had been one of those we thought was probably leaning against 2022, and he may still not be enamoured of the idea, but he is now sounding distinctly more balanced.

And then there is ECB Chief Economist Philip Lane’s recent contribution to the discussion. We are inclined to doubt that he has undergone a full-bore conversion away from being one of those most clearly against 2022, but on the basis of his emphasis of ‘the fact that there was a move in the data compared to our December assessment’, we move him up by one group to those probably against 2022.

When all is said and done, we now classify 10 Council members as being clearly or probably leaning against a 2022 lift-off versus 10 as being clearly in favour of or probably leaning towards a 2022 lift-off. Three are in the middle. Previously, we saw the 22 members then examined as being split 10:10, with two in the middle.

However, that masks an important change in that all those who have now simply been re-classified – meaning Lane, Kazāks and Villeroy – have been assigned to more hawkish groups than they had been in. Although Herodotou’s classification is rather dovish, this is an initial placement and we would never have assumed anyway that he was any less dovishly inclined.

Therefore, we would argue that momentum in favour of a 2022 rate hike has increased since February 14.

On the other hand, Russian dictator Vladimir Putin’s latest offences against civilisation constitute something of a geopolitical shock that may be mild so far but could open the door to worse. What the ECB will make of this is not yet clear, but as we noted last time, the timing of any move will come down to whatever information is available, so that circumstances can always render moot any such grouping as that here.

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.’

Latvijas Banka Governor Mārtiņš Kazāks on 16 February 2022: ‘It’s going to be data-dependent. We’ll see, but it’s quite likely that it happens this year. … We see inflation significantly above what we saw in the past and that shifts the gravity.’

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.’

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.’ On 18 February 2022: The ECB should be ‘somewhat quicker at adjusting monetary measures’.

Particularly data-dependent:

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.’

Banque de France Governor François Villeroy de Galhau on 22 February 2022: ‘Today, we are gradually reducing monetary support. In March, we will stop the exceptional measures linked to Covid. The next step will be to stop the other asset purchases. I would argue for doing this around the third quarter and keeping our options open depending on the evolution of inflation. Time is of the essence in order to avoid mistakes: we should not act too late at the risk of letting inflation get out of hand, nor too early at the risk of slowing down the recovery. There is no need to decide now on the date of a future interest rate hike.’

Probably leaning against a 2022 lift-off:

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.’ On 10 February 2022: ‘Some other central banks have either already raised rates or indicated that they will soon do so. In making comparisons, it’s worth remembering that the euro area is at a different stage of the economic cycle, just as it was when the pandemic started. So it’s natural that central banks around the globe won’t necessarily start raising rates at the same time. We are guided by our forward guidance conditions and will act if, and when, they have been met.’

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.’

Central Bank of Cyprus Governor Constantinos Herodotou on 16 February 2022: ‘Now, first we need to see that the forward guidance criteria, the three criteria, are fulfilled. We will see that with the March forecasts, the March ECB forecast. And should we see that that criteria are fulfilled from a forward guidance perspective, then the APP should be calibrated accordingly, so that the net purchases are terminated before any rate move. … And when we say “forecasts” … it’s not only the medium-term outlook on inflation, which has to be sustainably at 2%, but we need to see whether inflation expectations have moved. In our last Governing Council monetary policy meeting, inflation expectations were still well anchored. And we need to see whether there is wage growth that is beyond productivity growth.’

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.’

ECB Chief Economist Philip Lane on 17 February 2022: ‘…the current inflation rate is mostly an imported inflation shock, and it’s not the case that it's a kind of domestic demand boom overheating the European economy. So, in terms of urgency, I think gradualism makes sense in this scenario where we don’t have a de-anchoring to the upside situation. But what’s also true is in terms of the pathway for the economy. I mean, if inflation’s expected to set around 2% and if you have this period of above 2% inflation for a while. The interest rate paths, the path for asset purchases will have to take that into account. It’s a different path compared to a path where you think you have an open-ended, indefinite, below-2% situation, which is what we did have. So, there are implications of, if it turns out that inflation is projected to set around 2%, it’s a different monetary policy. But equally, it’s also not a monetary policy that requires a kind of significant tightening cycle.’ 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.’

Clearly against a 2022 lift-off:

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.’