ECB Insight: By Formal Count, Council May Seem to Favour 2022 Lift-Off, But Ukraine a Big Unknown

1 March 2022

By David Barwick – FRANKFURT (Econostream) – A week having passed since our last review of where each European Central Bank Governing Council member stands on the question of whether or not to start hiking interest rates this year, we want to take another look at the issue.

Obviously, a major geopolitical risk having materialised with Russia’s unprovoked military aggression towards Ukraine and the robust response of the civilised world in the form of sanctions, the outcome of this review needs to be treated with particular caution.

There is no question that some Council members will argue that Russian dictator Vladimir Putin’s war is (further) reason for the ECB to go slow. Those so inclined are above all those who already wanted the ECB to approach policy tightening without any haste. Or, as one Council member said to Econostream after the war’s start, ‘I expect that from certain quarters, but we will look at the other side as well.’

A heightened go-slow attitude has been seen already most clearly in recent comments by Executive Board member Fabio Panetta and Bank of Greece Governor Yannis Stournaras, both of whom we had classified from the get-go as clearly against a 2022 rate hike.

It is true that Austrian National Bank Governor Robert Holzmann, one of the biggest proponents of tightening without delay, said shortly after the outbreak of hostilities that normalisation ‘may now be somewhat delayed.’

We don’t really expect Holzmann to be at the forefront of those wanting to put everything on hold, but neither are we by any means arguing that the process won’t necessarily be delayed; few things increase uncertainty and hurt confidence like a war. On the other hand, there are aspects to be kept in mind, one of them that we are only two months into 2022 and on the sixth day of the Russian aggression.

While it may be hard to conceive from today’s perspective, large-scale military hostilities could be over within days. As unfortunate as the ultimate outcome may be for Ukraine, fears about a wider conflagration should then subside and concern over the inflationary fallout would again move towards the forefront of attention.

That fallout is only likely to add to already elevated price pressures. The latest numbers are already hardly such as to warrant complacency. There is a chance that being extremely cautious won’t mean the Governing Council puts things on hold, let alone for so long that an initial rate hike – for which it is far from naming the date - can no longer occur in 2022, but rather that it engages in particularly deep soul-searching before concluding that it has to continue – always with the option of pausing - on its very gradual path towards normalisation.

Most Council members haven’t yet said what they see as the implications of recent developments for normalisation, and might also want to have in hand the latest inflation data and perhaps the updated staff macroeconomic projections – though these do not incorporate Russian aggression - before staking out a position.

The review should perhaps be seen as our best guess as to how things might look if the dust from eastern Europe settled surprisingly quickly. The normalisation process was always going to be data-driven, and much time remains between now and the last monetary policy meeting of 2022 on December 15.

An important note is that while we had previously omitted Executive Board member Frank Elderson and Central Bank of Malta Governor Edward Scicluna for lack of relevant monetary policy comments, we now include them both, meaning our review covers the entire Governing Council.

While we suspect Elderson may lean in favour of a 2022 lift-off, out of an abundance of caution we place him in the group of those we call particularly data-dependent, which is in effect a neutral classification. Scicluna we assign to the group of those probably leaning towards hiking in 2022.

As before, 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.

We now classify 10 Council members as being clearly or probably leaning against a 2022 lift-off versus 11 as being clearly in favour of or probably leaning towards a 2022 lift-off. Four are in the middle. A week ago, we saw the 23 members then examined as being split 10:10, with three in the middle. Again, Ukraine is a massive question mark.

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 February 2022: ‘It’s clear that we’re moving toward normalizing monetary policy. It’s possible however that the speed may now be somewhat delayed.’ 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.’

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

Central Bank of Malta Governor Edward Scicluna on 24 February 2022: ‘What is relevant for inflationary expectations is whether consumers, firms and unions believe that governments are really committed to bring down the crisis related deficits and debts. If that is the case then indeed inflationary expectations would be eased accordingly. If on the other hand the taxpayers believe this will not happen, inflationary expectations may not become anchored at the required rate for price stability. They will argue that since governments do not do their part to see the debt burden falling to pre-pandemic levels through growth and fiscal rectitude then inflation will be left to reduce the debt burden through its known taxing method.’

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 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.’ 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.’

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.’

Executive Board member Frank Elderson: no recent relevant comments.

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 28 February 2022: ‘The dramatic conflict in Ukraine is now weighing negatively on both supply and demand conditions, making uncertainty more acute and exacerbating risks to the medium-term inflation outlook on both sides. In this environment, it would be unwise to pre-commit on future policy steps until the fallout from the current crisis becomes clearer.’

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.’