ECB Insight: Who’s for 75 Basis Points? Potential Supporters Abound, But Call Closer Than in July

5 September 2022

By David Barwick – FRANKFURT (Econostream) – Much like we did six weeks ago in the context of a potential 50-basis-point rate hike, we again consider the European Central Bank Governing Council member by member, this time with respect to the feasibility of a 75-basis-point hike at Thursday’s meeting.

Although Council members disagree as to whether the July outcome should be characterised as a compromise, the fact remains that the hawks backed the anti-fragmentation programme whilst the doves went along with a 50bp hike, all of which permitted the clear outcome coveted by ECB President Christine Lagarde.

This time, there is no similarly obvious basis on which a compromise could underpin a 75bp hike. The shift to a meeting-by-meeting approach based on data is not entirely consistent with a quid-pro-quo in which support for 75bp is exchanged for the promise of a gentler touch later.

Still, given the ECB’s capacity for saying one thing and doing another, in the case of a 75bp hike this week we wouldn’t rule out accompanying language from Lagarde that downplays the likelihood of more such aggressive steps.

An alternative compromise could conceivably involve an understanding that relegates QT to the back burner for another couple of meetings, or the approach to tiering, but we wouldn’t bet the house on this.

Should the decision come down to a formal vote, we bear in mind the words of a member who recently told Econostream that he saw a ‘strong majority’ of the body as being very determined to counter inflationary pressures.

An official tally is a rare procedure for the Governing Council, but the difficulty of making 75bp palatable to some members or, alternatively, inducing others to be content with 50bp while the euro continues to weaken and inflation again surprises on the upside, could require such an outcome.

A key difference this time versus July is that 75bp would be a rate hike of truly unusual magnitude for the ECB, unthinkable just weeks ago. The 50bp hike in July was expected in September at the latest anyway, rendering that decision mere front-loading on a minor scale.

That this is not so in September helps explain why Council members appear more hesitant to get squarely behind a 75bp hike, mainly limiting themselves to suggesting that the possibility be discussed.

Still, we interpret such calls as an expression of (likely) support for the idea; after all, we don’t see the more dovish members show any eagerness to expand the menu of options in a similar direction.

Another difference versus July is that the only likely alternative to 75bp, i.e. 50bp, probably wouldn’t feel as wrong as 25bp would have six weeks ago. At least, this was the case a mere two weeks ago. Today, the genie of 75bp having been let out of the bottle, policymakers may fret that anything less would court the risk of confirming suspicions of ECB weakness on inflation.

We also note that the pushback against 75bp has been rather listless. Most vehement has been Bank of Greece Governor Yannis Stournaras, but his arguments, as in last week’s interview with Econostream, are preoccupied with not hampering economic growth and thus susceptible to being seen by colleagues as insufficiently mindful of the ECB’s price stability mandate.

Whilst ECB Chief Economist Philip Lane made reasonably clear that 75bp would not be his preference, he has grown quite cautious and thus refrained from slamming the door on the option, declaring that ‘the appropriate size of the individual increments will be larger the wider the gap to the terminal rate and the more skewed the risks to the inflation target.’

And Lagarde? That she has been so quiet of late we interpret to mean that she is waiting to see which way the wind is blowing, allowing her to broker a deal from the vantage point of impartiality or at least to go with the flow.

The below tally of Council members, as in July, supports the idea that the hawks will win the dayyet again , though the outcome isn’t quite as cut and dried this time.

We count five Governing Council members as pretty clearly amenable to a 75bp rate hike, with another six a bit less obviously disposed to support such a move, but still probably willing.

Three Council members are in the group of those we are only ready to say might back 75bp, but by this we mean that they are more likely to do so than not to do so.

How another three members, among them Lagarde, would cast their vote is unclear, though this is not to say that none of them, including also Executive Board member Frank Elderson, could countenance an outsized rate hike.

Then there is a group of six members we characterise as ‘somewhat less clearly not amenable to 75 basis points in September’, including Lane and various of his colleagues from peripheral countries.

Finally, Stournaras and Panetta are the only two we consider pretty (or even quite) clearly not amenable to 75bp.

Where possible, for each Governing Council member we include a recent relevant quote indicative of the member’s thinking.

While the average of a mathematical approach would suggest that 75bp should prevail, and we are somewhat more inclined to expect this than 50bp, it remains a closer call than it was last time. Where Lane and Lagarde line up - neither would care to be on the losing side of a vote - is an important aspect that could tilt the outcome towards either direction.

Pretty clearly amenable to 75 basis points in September:

Austrian National Bank Governor Robert Holzmann:

31 August 2022: ‘If you move now from 50 basis points to 75 basis points you could do another 75 basis points and you’d quickly be at the’ neutral rate. ‘Then you could decide if you could stay there or go further.’

Latvijas Banka Governor Mārtiņš Kazāks:

28 August 2022: A move of ‘at least 50 basis points would be appropriate’. ‘The increase needs to be strong and significant, and at the current moment, I would say 50 or 75 basis points.’

Dutch National Bank Governor Klaas Knot:

30 August 2022: ‘On policy I would like to emphasize that the broadening and deepening of our inflation problem generates the need to act forcefully. A swift normalisation of interest rates is an essential first phase, and some front-loading should not be excluded.’

Eesti Pank Governor Madis Müller:

30 August 2022: ‘I think 75 basis points should be among the options for September. We should not be too timid with policy moves as inflation has been too high for too long and we are still far below the neutral rate.’

Bundesbank President Joachim Nagel:

30 August 2022: ‘As I see it, a larger interest rate increment reduces the risk of inflation expectations becoming unanchored. Moreover, it lowers the risk of us having to increase interest rates too drastically at a later stage. We also should not delay further interest rate moves out of fear of a possible recession. Empirical findings support this approach. Based on these findings, data from a number of countries show that “frontloading”, that is, bringing forward interest rate moves, lowers the risk of the economy suffering a hard landing.’

Somewhat less clearly amenable to 75 basis points in September:

ECB Executive Board member Isabel Schnabel:

27 August 2022: ‘Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high. In this environment, central banks need to act forcefully. They need to lean with determination against the risk of people starting to doubt the long-term stability of our fiat currencies. Regaining and preserving trust requires us to bring inflation back to target quickly. The longer inflation stays high, the greater the risk that the public will lose confidence in our determination and ability to preserve purchasing power.’

Bank of Finland Governor Olli Rehn:

29 August 2022: ‘We raised rates in July by 50 basis points. The next step will be a significant move in September, depending on the incoming data on the economic and inflation outlook. … I think it's important not to jump the gun, and let's see the figures in September. We will get the next economic projection exercise in front of us prior to the meeting. And we will have the latest incoming data in September. Then we will see. As I said, we have a clearly excessively high inflation in Europe now, and this means that according to our mandate, which is price stability, we have to act now. And monetary policy is now facing the dilemma of on one hand maintaining inflation expectations anchored, and on the other hand avoiding that we will push the economy unnecessarily to a recession because of monetary policy.’

National Bank of Belgium Governor Pierre Wunsch

National Bank of Slovakia Governor Peter Kažimír

Banka Slovenije Governor Boštjan Vasle

Bank of Lithuania Chairman of the Board Gediminas Šimkus

Might be amenable to 75 basis points in September:

Banque de France Governor François Villeroy de Galhau:

27 August 2022: ‘According to me, for the euro area, until we are around R*, the neutral rate—which possibly lies between 1 and 2% in nominal terms—the road ahead is clear and we can go in a sustained and determined way, including through some guidance. Doing so is normalisation, lifting our foot from the accelerator pedal. In my view, we could be there before the end of the year, after another significant step in September.’

Central Bank of Luxembourg Governor Gaston Reinesch

Central Bank of Malta Governor Edward Scicluna

Unclear whether amenable or not to 75 basis points in September:

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.’

Central Bank of Ireland Governor Gabriel Makhlouf

ECB Executive Board member Frank Elderson

Somewhat less clearly not amenable to 75 basis points in September:

ECB Chief Economist Philip Lane:

29 August 2022: ‘A steady pace (that is neither too slow nor too fast) in closing the gap to the terminal rate is important for several reasons. First, there is uncertainty about the transmission of policy rate changes to overall financing conditions, such that it makes sense to allow the financial system to absorb rate changes in a step-by-step manner. In particular, the same cumulative rate hike over a fixed interval is less likely to generate adverse feedback loops (that in turn could pose new risks to price stability) if it takes the form of a multi-step calibrated series rather than a smaller number of larger rate increases. Of course, in calibrating a multi-step series, the appropriate size of the individual increments will be larger the wider the gap to the terminal rate and the more skewed the risks to the inflation target.’

Banco de Portugal Governor Mario Centeno:

01 September 2022: ‘‘We should be worried and act - as consumers and policymakers - about the inflation numbers we've seen. But we also have to remember the need to think longer-term in these processes...and we should be guided by patience. … Pro-cyclical policies are all we should avoid.’

Banca d’Italia Governor Ignazio Visco:

28 July 2022: ‘There is a risk of a recession’, in which case the ECB would ‘need to discuss what to do.’

Banco de España Governor Pablo Hernández de Cos:

26 July 2022: ‘This 50-basis-point increase brings forward the exit from negative interest rates, but does not imply an increase in the terminal level of the rate path. The pace at which we approach that level will be determined by the data we see in the coming meetings and how they affect our medium-term inflation target of 2%. In other words, interest rate decisions will be taken at each meeting.’

ECB Vice President Luis de Guindos

Central Bank of Cyprus Governor Constantinos Herodotou

Pretty clearly not amenable to 75 basis points in September:

Bank of Greece Governor Yannis Stournaras:

31 August 2022: ‘This is why I believe in normalising policy rates only gradually, because in my view it is misguided to hike to a very high level at the risk of then having to backtrack and start cutting rates. A gradual approach is the only appropriate one.’

ECB Executive Board member Fabio Panetta:

23 August 2022: Any monetary policy adjustment ‘needs to be strictly data dependent, taking fully into consideration the condition of the euro-area economy. This implies first of all to be fully aware that the probability of a recession is increasing in the euro area…’