ECB Insight: Monetary Policy Very Much on the Mind in Northern Finland

22 February 2023

ECB Insight: Monetary Policy Very Much on the Mind in Northern Finland
- ECB’s Kazāks: Council retreat occasion to align our views, express our worries and perspectives
- ECB’s Kazāks: ‘The meeting in Finland will prepare us for policy decisions going forward’

By David Barwick – FRANKFURT (Econostream) – The European Central Bank Governing Council is holding Wednesday’s non-monetary policy meeting in northern Finland’s Inari, a place we can imagine only one of its members had ever heard of before the suggestion was made to hold the gathering at this relatively out-of-the-way locale.

That member would naturally be Bank of Finland Governor Olli Rehn, whose institution earlier this month issued a statement explaining that ‘the agenda [of the meeting] will cover various matters within the Governing Council’s responsibilities, but will not include monetary policy.’

Whilst we wouldn’t dispute that an announcement on the latter subject is unlikely to be forthcoming tomorrow, or that authorities will hardly pre-empt their March decision more than three weeks ahead of time and without the updated forecasts, we think monetary policy will nevertheless permeate the discussions. The result could put the Council on a smoother path to determining the evolution of interest rates ahead.

In an interview with Econostream in early February, Latvijas Banka Governor Mārtiņš Kazāks described the meeting as an occasion to ‘discuss all the topical issues for which we don’t have enough time at our monetary policy meetings, see the work of the staff and prepare our monetary policy steps going forward.’

Kazāks made clear that actual decisions on the monetary policy stance were unlikely to be taken.

‘We will take the next monetary policy decision in March, unless something happens and the environment changes and we need to react sooner than that, which is not in the cards at the moment’, he said.

‘But the meeting in Finland will prepare us for policy decisions going forward’, he added. ‘We will align our views, we will have a chance to express our worries, our perspectives, all of which helps to make the decision process smoother, more seamless.’

Econostream very recently had occasion to ask another ECB insider what he expected to be discussed in Inari and got an answer consistent with Kazāks’ assessment.

‘Conceptual issues’ was one aspect of his response. It was possible that the Governing Council would arrive at some sort of general understanding about how to make the decisions that lie ahead, he said.

Communication was also likely to play a role, he added; in particular, there might be ‘some discussion about too many people talking differently’.

If the meeting succeeds in getting Governing Council members more aligned, a logical and quickly apparent outcome would be a change in tone in their public communication. A divergence of views has become increasingly noticeable as the question looms ever larger of what path monetary policy should take following March’s highly likely 50bp hike.

Even Council members have started to comment on the widening gap.

‘Monetary policy deserves better than a “live” prediction contest, or an overinterpretation of statements by different individuals’, Banque de France Governor François Villeroy de Galhau said last week.

Ten days ago, Banca d’Italia Governor Ignazio Visco issued a more pointed call for restraint: ‘I also believe that we should be very careful in providing a quantitative evaluation of the effects of preferring one or the other of the two opposite risks of doing too much or too little’, he said.

We would not be shocked if one faction or another left snowbound Inari with the sentiment that the stage had been set to favour a particular outcome at the next monetary policy meeting on March 16 (by ‘outcome’ we refer to everything but the 50bp hike we expect to result in almost any event).

If so, this may become evident in subsequent comments. For now, we note that the hawks have continued to dominate public discussion and still have greater numbers, though the doves have been pushing back more recently and their wish to attach greater weight to the risk of doing too much must eventually eclipse the opposite fear.

With the updated staff forecasts not yet available, but with the Council potentially to be told to expect less pronounced revisions than the markets anticipate, we think it best to wait for and watch ECB speakers in the following days.

Of particular interest would be any comments to emerge from ECB President Christine Lagarde during the meeting on Friday and Saturday of G20 finance ministers and central bank governors, as well as the appearance by Executive Board member Isabel Schnabel on Thursday of next week.