ECB Insight: Who’s for 50 Basis Points? No Shortage of Likely Advocates Even Beyond the Usual Suspects

20 July 2022

By David Barwick – FRANKFURT (Econostream) – Considering the European Central Bank Governing Council member by member with respect to the feasibility of a 50-basis-point hike this week, our conclusion is that there are three main scenarios under which the ECB sticks to 25.

These are: (1) new data argue against the bolder move; (2) leadership quashes the idea of more for any reason; and (3) the Council lacks confidence in its new anti-fragmentation instrument, such as it is (and possibly for good reason).

It is no accident that we don't include the idea that 50 basis points simply lacks adequate backing, inasmuch as a straightforward case-by-case review strongly suggests that on the basis of the numbers alone, the motion would stand a decent chance of passing.

The simple fact is that a hike of 25 basis points in July had been seen as an understanding of sorts reached on June 9, meaning it was taken for granted by many Council members until recently, as evidenced by the comment of Vice President Luis de Guindos that we reproduce below.

That – perhaps along with traditional central banking reticence about such matters – would explain why members have been hesitant to go public with an appeal to consider a larger step.

This taboo has by now presumably been dispensed with, so that at least behind closed doors, there should be little – absent one of our three scenarios above – to inhibit a no-holds-barred discussion about the merits of following the example of many of the ECB’s peer institutions that haven’t approached policy normalisation as timidly.

The below tally of potential and obvious supporters of a 50-basis-point hike this month leaves little doubt that the outcome isn’t just a theoretical possibility. We count eight Governing Council members as clearly or probably against 50 basis points in July, while ten are publicly or probably in favour, and another three we can somewhat more readily envisage supporting rather than opposing the idea.

Those towards the top have been clearest in their advocacy for going big, while those towards the bottom have been least secretive about their preference to go slow. Where possible, for each Governing Council member we include a recent quote indicative of the member’s thinking.

We are aware of the discrepancy in some cases between the apparent stance of the respective Council member, or lack thereof, and our classification with respect to a hike of 50 basis points in July. We stand by our assessment.

Publicly in favour of 50 basis points in July:

Austrian National Bank Governor Robert Holzmann:

01 June 2022: ‘A 50-basis-point rise would send the necessary clear signal that the ECB is serious about fighting inflation. A clear interest-rate signal would also help to support the euro’s exchange rate. The weak euro is not helpful on the inflation front.’

Latvijas Banka Governor Mārtiņš Kazāks:

28 June 2022: ‘Twenty-five basis points in July would be a reasonable first step, but I would not exclude that the market situation changes between now and then and that we need to take stronger action.’

Bank of Lithuania Chairman of the Board Gediminas Šimkus:

29 June 2022: ‘Of course we should see some change in the data, some change in relation to what we have seen at the beginning of June. But if we see this change in data that points to the persistence of inflation, to its acceleration, 50 basis points should be a policy option for July.’

Likely to support 50 basis points in July:

Dutch National Bank Governor Klaas Knot:

17 June 2022: ‘If [core inflation] continues to rise then we will continue to intensify, and there will be multiple interest rate hikes of 50 basis points.’

Bundesbank President Joachim Nagel:

04 July 2022: ‘[M]onetary policy cannot afford to simply “look through” price inflation. If it does not act now, there is a risk that the high rates of inflation will become entrenched. This is all the more true given that the price increases are now becoming increasingly widespread.’

Eesti Pank Governor Madis Müller:

04 July 2022: ‘Given the inflation outlook, it’s appropriate to start raising interest rates in July’ by 25 basis points. ‘We should continue with a further hike of 50 basis points in September.’

National Bank of Belgium Governor Pierre Wunsch:

15 June 2022: ‘My personal opinion is that the next 150-200 basis points hikes are no-brainers because then we would still be with negative real rates in the short term. It’s only when you go beyond that you really start being less expansionary in real terms. … The fact that we have more or less committed -- unless the situation improves -- to a more than 25-basis-point hike means that our understanding of gradualism doesn’t exclude increases of that magnitude.’

Central Bank of Malta Governor Edward Scicluna:

30 May 2022: ‘Gradualism comes from uncertainty, and in the face of uncertainty, you need to be flexible, you need the maximum degree of freedom. However, when you’re dilly-dallying there are costs. Gradualism can only be done from the comfort of uncertainty, and if you can afford to delay. But there comes a point when the costs of not doing or doing nothing are too high.’

National Bank of Slovakia Governor Peter Kažimír:

21 June 2022: ‘Negative rates must be history by September.’

Banka Slovenije Governor Boštjan Vasle

Might support 50 basis points in July:

Central Bank of Ireland Governor Gabriel Makhlouf:

16 June 2022: ‘I think the nature of inflation that we’ve been seeing in the euro area changed, it has changed from where it was last year. I mean the risk of it becoming more embedded. It’s beginning to look like different enough to being purely a supply shock and the response to a supply shock. That it required action on our part. But we’re still running a very accommodative monetary policy. I was saying to someone earlier today… what we are now seeing last week was we’re moving into our main rate from -0.5% to -0.25%. I mean I know we’re moving but we’re still very low.’

ECB Executive Board member Isabel Schnabel:

02 July 2022: ‘Inflation pressures are becoming increasingly broad-based … No signs yet of a wage-price spiral, but risks are increasing’

Central Bank of Luxembourg Governor Gaston Reinesch:

28 June 2022: Inflation is ‘excessively high’.

Unclear:

Bank of Finland Governor Olli Rehn:

18 June 2022: ‘In our policy analysis, we need to be mindful of the pervasive uncertainty surrounding the global economy. Supply shocks that are raising inflation and slowing growth do call for a well calibrated policy normalisation. Monetary policy cannot do much about rising energy prices, but it can influence inflation expectations to stay anchored around the target. That is, we –the central banks – have the means to maintain price stability, and as shown earlier this week by the Fed, we clearly have the will to do so.’

Banque de France Governor François Villeroy de Galhau:

07 July 2022: ‘The Eurosystem will normalise its monetary policy as much as necessary: first by exiting from the exceptional measures taken when there was, in particular at the start of the Covid crisis, a danger of deflation (including the end of negative rates by September). Then by continuing to raise its rates to reach a “neutral” level in subsequent quarters, between 1 and 2% in the short term. Finally, by only going beyond this normalisation towards a possible tightening if the inflation data so require.’

ECB President Christine Lagarde:

28 June 2022: ‘[T]here are clearly conditions in which gradualism would not be appropriate. If, for example, we were to see higher inflation threatening to de-anchor inflation expectations, or signs of a more permanent loss of economic potential that limits resource availability, we would need to withdraw accommodation more promptly to stamp out the risk of a self-fulfilling spiral.’

ECB Executive Board member Frank Elderson

Probably against 50 basis points in July:

ECB Chief Economist Philip Lane:

30 May 2022: ‘What we see today is that it is appropriate to move out of negative rates by the end of the third quarter, and that the process should be gradual. Normalisation has a natural focus on moving in units of 25 basis points, so increases of 25 basis points in the July and September meetings are a benchmark pace. Any discussion about other moves would have to make the case for moving more strongly than this sequence of hikes in July and September. The discussion will be had, but our current assessment of the situation, where we think the medium-term inflation outlook is in line with our two per cent target, calls for a gradual approach to normalisation.’

ECB Vice President Luis de Guindos:

24 June 2022: ‘Well, the communication is firm, and, you know, I am not going to modify the communication because I think that, you know, the 25 basis points for July are done. What happens later on, well, we will see. In September it will depend on the outlook.'

Banco de Portugal Governor Mario Centeno:

13 May 2022: ‘Patience and gradualism in monetary policy are necessary and must be proportionate to the shocks we face. Monetary policy must not overreact, in a sign of unwarranted nervousness that would create instability and fragmentation. An untimely reaction will also penalize economic growth.’

Banca d’Italia Governor Ignazio Visco:

08 July 2022: ‘[T]he environment remains highly volatile: it therefore remains crucial to prevent an excessive tightening of financing conditions, which would have serious repercussions for financial stability, economic activity and, ultimately, price growth in the medium term. It is crucial that monetary policy action is accompanied by a clear determination of the fiscal authorities to keep public finances on a rebalancing path.’

Banco de España Governor Pablo Hernández de Cos:

07 July 2022: ‘[O]ur projections on inflation, which currently anticipate that it will remain high in the coming months, but will moderate gradually thereafter to levels compatible with the ECB’s medium-term inflation target of 2%, is based on the assumption that there will be a slowdown in the growth of energy prices, in line with those on the futures markets, and that a moderate wage growth response and a squeezing of trade margins will prevent the emergence of the price-wage feedback loop.’

Central Bank of Cyprus Governor Constantinos Herodotou:

08 July 2022: ‘Broader and intensified inflation pressures that would threaten to de-anchor inflation expectations could require quicker rate moves.’

Clearly against 50 basis points in July:

Bank of Greece Governor Yannis Stournaras:

09 July 2022: Opposed to 50 basis points now ‘[b]ecause we have to, also to affect expectations in the right way. We should give, we should pass that message. So, judging on the situation on the data, for the moment it's very likely that it is going to be 25 basis points, as we have decided before.’

ECB Executive Board member Fabio Panetta:

01 July 2022: ‘[T]here is already an adjustment working its way through the economy. Nominal yields and real rates have seen a material increase in recent months. Banks have started to tighten their credit conditions and expect to further tighten them markedly in the coming quarters. Given the prevailing uncertainty, normalisation should remain gradual.’