ECB Insight: Tally of Council Suggests Will to Hike in 2022 So Far Largely Unaffected by War

23 March 2022

By David Barwick – FRANKFURT (Econostream) – Three weeks after our last review of where each European Central Bank Governing Council member stands on whether or not to start hiking interest rates this year, we re-examine the question. Our finding, summed up: the more things change, the more they stay the same.

After a major geopolitical risk materialised with Russia’s attack on Ukraine and the resulting waves of sanctions imposed on the Russian kleptocracy by the civilised world, there was uncertainty on the part of observers as to whether monetary policymakers, some of whom were displaying a new hesitancy, would stay the course of normalisation.

That is all quite understandable. Also understandable is that a certain acclimatisation to a changed reality has started supplanting the initial shock triggered by the outbreak of war in 21st-century Europe. The swift realisation that the more lasting shock would be inflationary, plus last month’s further upside HICP surprise, did the rest.

And so it is that a close examination of each member of the Governing Council – except for the rare cases when a dearth of public comments makes this difficult – suggests that there is approximately as much appetite for a rate hike this year as ever.

Admittedly, we have downgraded both Austrian National Bank Governor Robert Holzmann and Latvijas Banka Governor Mārtiņš Kazāks into the group of those just ‘probably leaning towards a 2022 lift-off’. However, neither has expressed himself clearly on the issue in several weeks, and we think that if incoming data continue to be of the sort that would have argued for a 2022 rate hike in the absence of war, then these two relatively hawkish member of the Council will with high probability support early lift-off.

On the other hand, a number of Council members actually sound somewhat more hawkish now. These include National Bank of Slovakia Governor Peter Kažimír, Central Bank of Ireland Governor Gabriel Makhlouf and Executive Board member Isabel Schnabel, all of whom we have nevertheless, out of an abundance of caution, continued to classify as ‘probably leaning towards a 2022 lift-off’.

Ultimately, we view 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.

That is the same outcome as last time. We suspect that another upside inflation surprise in March and the increased likelihood as time passes that policymakers will communicate a clear stance could be all that is needed for the balance of our assessment to tilt further in the direction of hiking rates this year.

As always, 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. Where possible, for each Governing Council member we include both the most recent relevant quote indicative of the member’s thinking and a previous comment for comparison.

Clearly in favour of a 2022 lift-off:

Dutch National Bank Governor Klaas Knot:

  • 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.’
  • 17 March 2022: ‘I find it [the possibility of a rate hike in the coming months] a realistic expectation but by no means a certainty. I also cannot exclude two hikes this year but that is only in the case in which incoming data would point to a further upward revision of the medium-term inflation outlook.’

Bundesbank President Joachim Nagel:

  • 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.’
  • 21 March 2022: ‘If the net purchases end in the third quarter, as currently planned, this opens up the possibility of raising key interest rates this year if necessary.’

Probably leaning towards a 2022 lift-off:

Austrian National Bank Governor Robert Holzmann:

  • 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.’
  • 21 March 2022: ‘The system of bond purchases is difficult for the population to understand. An interest rate increase [before net asset purchases end] would have been a signal that everyone would have understood.’

Latvijas Banka Governor Mārtiņš Kazāks:

  • 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.’
  • 02 March 2022: ‘It’s still too early to say [whether a 2022 rate hike is off the table], but the increased uncertainty makes me more cautious. On the other hand, gradual does not mean slow and behind the curve. If necessary, we can be gradual and still step up the pace.’

Eesti Pank Governor Madis Müller:

  • 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...’
  • 11 March 2022: ‘Earlier, we planned to continue supporting the economy with bond purchases at least until the end of this year. The decision made on Thursday also creates an opportunity to raise interest rates earlier than previously planned, although it is certainly too early to allow anything concrete in this regard.’

National Bank of Slovakia Governor Peter Kažimír:

  • 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.’
  • 11 March 2022: ‘I consider the decision to reduce the pace of purchases within our APP program and the earlier termination of these purchases in September at the latest to be correct and I strongly supported it. … it is a sign of our unwavering determination to pursue a policy of gradually reducing inflation towards our goal in the coming years. This requires a phased normalization... The increase in key interest rates will not come immediately, it still has its time. We will determine the timing and pace of the forthcoming tightening of monetary policy according to the conditions in the economy, together with increasing information.’

Central Bank of Ireland Governor Gabriel Makhlouf:

  • 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.’
  • 21 March 2022: ‘Even before the invasion of Ukraine, inflationary pressures were being stoked by a range of bottlenecks within the global economy, leading to supply-demand imbalances in many sectors. From the point of view of the Irish economy, the tragedy unfolding in Ukraine can be thought of as an exacerbating factor which will make more acute many of the difficulties that were already causing inflationary pressures...’

ECB Executive Board member Isabel Schnabel:

  • 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.’
  • 17 March 2022: ‘On the one hand, prudence is needed in order to minimise the negative impact that a change in the course of monetary policy could have on aggregate demand at a time when the economy is suffering from higher energy and food prices. This is even more true in light of the uncertainty that Russia’s invasion of Ukraine implies for confidence and aggregate demand in the euro area. On the other hand, even when considering this uncertainty, the current inflation outlook is no longer consistent with the exceptional policy measures we took to fight very low inflation. An end of net asset purchases in the third quarter of this year, as we currently expect, will still leave our overall policy stance highly accommodative. In this environment, prudence may also come at a cost: a reaction function that differs materially from that of other central banks facing a protracted period of above-target inflation risks amplifying the energy price shock by weighing on the exchange rate, thereby adding to the burden on real household income.’

Central Bank of Luxembourg Governor Gaston Reinesch:

  • 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:

  • 18 February 2022: The ECB should be ‘somewhat quicker at adjusting monetary measures’.
  • 11 March 2022: ‘As the recovery continues, high inflation continues to persist. With rapid growth in energy prices and congestion in supply chains, it is becoming more and more well-established, reaching 5.8% in February.’

Central Bank of Malta Governor Edward Scicluna:

  • 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:

  • 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:

  • 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.’
  • 22 March 2022: ‘If Russia’s invasion doesn’t cause a major blackthorn winter for the European economy, we’ll continue normalising the monetary policy gradually. An interest rate increase can thus be expected either toward the end of this year or early next year.’

Banque de France Governor François Villeroy de Galhau:

  • 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.’
  • 22 March 2022: ‘On the ECB side, we need to continue with the gradual normalisation of monetary policy in order to keep inflation expectations anchored - it is indeed time to take the foot off the inflation accelerator, as we decided at our last Governing Council. That said, we should not overreact to short-term volatility in energy prices; rather, we should focus more on core inflation and the medium term.’

Executive Board member Frank Elderson: no recent relevant comments.

Probably leaning against a 2022 lift-off:

ECB Vice President Luis de Guindos:

  • 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.’
  • 15 March 2022: ‘We have said we were going to reduce our purchase programme. But we have decoupled in a way the raising of interest rates from the ending of this purchase programme. And so it will depend on the data that we get. ... But what I would basically say, we are in a process of normalisation of monetary policy from the point of view of purchases, but that does not at all imply that we are going to raise interest rates immediately.'

Bank of Lithuania Chairman of the Board Gediminas Šimkus:

  • 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:

  • 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:

  • 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.’
  • 16 March 2022: ‘So, what it means to have a more neutral stance at this stage is to continue our path of net purchases throughout this year, evaluate the data that we have at hand. Of course, inflation pressure is very high at this stage, but we don’t, we don’t see any evidence of second-round effects, and that’s precisely, I am also of the opinion that the conditions, for example for rate lift-off, are not met yet. Core inflation is driven by external factors and not by domestic factors such as wages and second-round effects. Indeed, the ECB forecast for wage growth was revised downward last week, and this is precisely where we are today.’

ECB President Christine Lagarde:

  • 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.’
  • 17 March 2022: ‘…gradualism is a well-established principle for central banks in times of uncertainty. When faced with uncertainty about the resilience of the economy, it pays to move carefully. In keeping with this, we have adjusted our forward guidance on interest rates to temper expectations of any abrupt or automatic moves. We now say that the adjustment of key ECB interest rates will take place “some time after” the end of net purchases. This maintains our traditional sequencing logic, but also gives us extra space if needed after we stop purchasing bonds and before we take the next step towards normalisation. This will allow us to test whether the convergence of inflation to our target that we project today is robust to current and potential new shocks. The length of the interval between these two decisions will be determined by our strategy and by the three conditions that govern our forward guidance on interest rates.’

ECB Chief Economist Philip Lane:

  • 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.’

Clearly against a 2022 lift-off:

Banca d’Italia Governor Ignazio Visco:

  • 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.’
  • 17 March 2022: ‘I strongly believe that monetary policy in the euro area has not been behind the curve. … And there is certainly good reason to believe that, given wage prospects and the state of expectations, headline inflation will progressively converge to 2% as the serious disturbances generated by the dramatic evolution of the Russia-Ukraine war fade away. … the main response to what is essentially a tax cannot come from monetary policy, especially in the absence of a wage-price loop and with inflation expectations re-anchoring to the central bank’s objective.’

Bank of Greece Governor Yannis Stournaras:

  • 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.’
  • 11 March 2022: ‘We did not make a decision to raise interest rates, nor to stop bond purchases. This is important because the European Central Bank in this difficult situation provides liquidity to the banks, it provides liquidity to the governments, so there is no reason to worry about monetary policy. We just took a small step, we took, to put it simply, our foot a little off the gas, but just a little. We're not stepping on the gas that much, we probably won't be stepping on it from June onwards.’

ECB Executive Board member Fabio Panetta:

  • 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:

  • 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.’
  • 15 March 2022: ‘… we agreed that any adjustment of interest rates will take place some time after the end of our net purchases under the APP and will be gradual. The change from shortly before to some time after means maintaining the sequential process by which we intend to adjust our instruments, but it widens the time lag between these two events: the end of net purchases and the point at which we start to raise our interest rates. And this increases the flexibility with which we can execute our decisions in such an uncertain economic and geopolitical context. For its part, the gradualness of the interest rate adjustment shows the Governing Council's commitment to avoid abrupt adjustments in monetary policy instruments.’