ECB Insight: Momentum Behind 2022 Rates Lift-Off Gathers Further

5 April 2022

By David Barwick – FRANKFURT (Econostream) – Almost two weeks after our last review of where each European Central Bank Governing Council member stands on rates lift-off in the current year, we take another look to see whether our informal impression that support for this has been growing stands up to inspection. It does.

We have been quite conservative in our classification, which means that whilst officials like member Banco de España Governor Pablo Hernández de Cos, Banca d’Italia Governor Ignazio Visco and especially Bank of Greece Governor Yannis Stournaras have all been sounding more resigned to the inevitable lately, we continue to posit that they would prefer not to hike rates this year.

Similarly, although ECB Executive Board member Isabel Schnabel has been consistently hawkish, we still don’t assume anything more than that she is merely ‘probably leaning towards a 2022 lift-off’.

We have nonetheless made a number of changes. First, we have moved Austrian National Bank Governor Robert Holzmann back to the group of those clearly in favour of hiking this year, after having briefly downgraded his eagerness last time only out of an abundance of caution following less definitive comments from him immediately after the outbreak of the war.

As well, we have now shifted Eesti Pank Governor Madis Müller, Banka Slovenije Governor Boštjan Vasle and National Bank of Slovakia Governor Peter Kažimír all up to the most pro-2022 lift-off group, consistent with their most recent statements.

Finally, we have placed ECB Executive Board member Frank Elderson, who recently gave his first substantive monetary policy speech, with those we assess as likely to support hiking rates before January 2023.

All these changes point in the same direction and suggest that an increasing likelihood of the first rate hike of the cycle occurring this year. The upshot is that, whilst - as last time - we view 10 Council members as clearly or probably leaning against a 2022 lift-off, we now see 12 (versus 11 last time) as being clearly in favour of or probably leaning towards a 2022 lift-off. Three are in the middle, one fewer than last time.

That sounds like a small change, but the headline numbers mask a distinction worth pointing out, namely that nothing has changed about the distribution on the side of those clearly or probably leaning against a 2022 lift-off, whereas among those clearly in favour of or probably leaning towards hiking this year, the most hawkish group has almost doubled in size.

The reason for such an evolution is probably as we noted last time, i.e. 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.’

The reasoning remains valid.

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:

01 April 2022: ‘I believe we should be out of asset purchases before the summer, and then when we come back from our summer break, I don’t think we are currently in the position to exclude any possible scenario with respect to lift-off. So, yes, that could be September, October, December – it should all be possible.’

Bundesbank President Joachim Nagel:

01 April 2022: ‘We on the ECB Governing Council have been very clear: monetary policy measures are data-dependent. The inflation data speak for themselves. Monetary policy should not pass up the opportunity for timely countermeasures.’

Austrian National Bank Governor Robert Holzmann:

30 March 2022: ‘In any case, what was and is planned is to stop buying assets before the first interest rate step is taken. However, according to the forward guidance, the formulation, this can also take place quickly, and therefore, even if it were decided that there would be no more securities purchases as of July, one could, if one wished, take the first interest rate step in September and the second in December. That would be consistent with the announcements.’

Eesti Pank Governor Madis Müller:

24 March 2022: ‘‘We shouldn't rule out interest rate hikes in 2022. I wouldn't be surprised if that will be the case at the end.’

Banka Slovenije Governor Boštjan Vasle:

04 April 2022: ‘The most important thing for me is that we will start this process not very late in the year and have the opportunity to be out of negative territory by the turn of the year. … We’re still expecting quite strong positive growth rates, and if that scenario materializes I don’t see any reasons why we wouldn’t continue with policy normalization after the turn of the year and go above zero with interest rates.’

National Bank of Slovakia Governor Peter Kažimír:

30 March 2022: ‘If there is no dramatic escalation of the conflict in Ukraine, the first interest rate hike could take place towards the end of this year.’

Probably leaning towards a 2022 lift-off:

Latvijas Banka Governor Mārtiņš Kazāks:

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.’

Central Bank of Ireland Governor Gabriel Makhlouf:

30 March 2022: ‘The current rates of inflation are driven by higher global energy prices and supply bottlenecks, with some knock-on implications of the energy price rise for the prices of other consumer goods and services. And it should be noted that these increases in official consumer prices for energy and fuel are yet to reflect in full the developments of recent weeks and the implications of the conflict in Ukraine.’

ECB Executive Board member Isabel Schnabel:

02 April 2022: ‘…given the exceptional accommodative monetary policy measures still in place and the growing risks of inflation settling above our target over the medium term, continuing the process of policy normalisation that we started in December 2021 remains the appropriate course of action for monetary policy.’

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.’

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.’

ECB Executive Board member Frank Elderson:

24 March 2022: ‘With inflation stubbornly above our target for so long, some concerns have been raised about the risk of “second-round effects”, which could make high inflation even more persistent. ... Our current inflation projection accounts for some increase in wages building on historical regularities of pass-through from inflation to wages and further spillback mechanisms. And at present we are not yet observing stronger second-round effects than projected. At the same time, we are mindful that some ingredients for potential stronger effects are in place. Slowing growth and high inflation put pressure on households’ real disposable income that they may seek to recover through higher wages in an economy in which labour market shortages and other supply side bottlenecks are lingering.’

Particularly data-dependent:

National Bank of Belgium Governor Pierre Wunsch:

28 March 2022: ‘In the next few weeks, it is not impossible that we will reach the 10% mark, but we are close to a peak. For a number of reasons, some of them technical, the inflation rate is likely to fall in the second half of the year.’

Bank of Finland Governor Olli Rehn:

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 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.’

Probably leaning against a 2022 lift-off:

ECB Vice President Luis de Guindos:

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:

24 March 2022: ‘[N]ormalisation of the ECB’s monetary policy will be carried out gradually and proportionally at the end of this year.’

ECB President Christine Lagarde:

26 March 2022: ‘We remain very attentive to the prevailing uncertainties. The calibration of our policies will remain data-dependent and reflect our evolving assessment of the outlook. We will take whatever action is needed to fulfil our mandate to pursue price stability and safeguard financial stability.’

ECB Chief Economist Philip Lane:

01 April 2022: ‘…Remember what we have now is: we have policies that that were introduced when we had inflation far below target. And what essentially we've been talking all year long is about the appropriate pace of normalisation. I think it ultimately remains the case that we now have inflation right now well above target, and these considerations … about possible hits to demand, possible slowdowns of the economy, to me it's really about the appropriate pace of normalisation. It's not a set of situations where I think additional monetary support compared to where we've been is really, I think, going to be part of the answer.’

Clearly against a 2022 lift-off:

Banca d’Italia Governor Ignazio Visco:

23 March 2022: ‘We have now very, very negative real interest rates. It is, I think a normal world, a world in which we have to go is a world in which real negative rates are not there anymore.’

Bank of Greece Governor Yannis Stournaras:

30 March 2022: ‘I don't rule out that we may have a small increase in interest rates towards the end of the year. But this is not something that we can say now, nor will I rush to say right now that there should be an interest rate increase.’

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:

29 March 2022: ‘There is less need to reinforce the accommodative tone through net asset purchases: monthly APP purchases are reduced for Q2 and the calibration for Q3 will depend on the evolution of the economic outlook.’