Exclusive: ECB Insider: Slowing to 25BP But Hiking for Longer Could Be a Compromise

8 March 2023

Exclusive: ECB Insider: Slowing to 25BP But Hiking for Longer Could Be a Compromise
- ECB insider: Reducing pace of hiking post-March to 25bp the correct strategy
- ECB insider: Others will oppose post-March slowdown of tightening pace
- ECB insider: ‘Very little discussion that we are now in restrictive territory’
- ECB insider: Some Council members will see the ECB as no longer very far from the terminal rate

By David Barwick – FRANKFURT (Econostream) – As the public debate over the European Central Bank’s next monetary policy steps takes on a more polarised tone, an eventual compromise between different sides could involve slowing the pace of tightening but, subject to developments, being open to hiking for longer, according to an ECB insider who spoke recently to Econostream.

Whether this would lead to a policy recalibration already as of May was not excluded but far from certain, this person said. A 50bp hike in March was a virtual certainty, he indicated, and so the question of whether to start ‘fine-tuning’ with smaller moves applied only to decisions from the subsequent monetary policy meeting on May 4.

‘If you ask me personally, I think that would be a reasonable decision to take, but there will be people defending different things’, he said. ‘With smaller steps, you can adjust faster to the data’, making a deceleration to increments of 25bp ‘the right strategy.’

The possibility of trading larger increments for smaller rate hikes that might – depending on incoming information – continue for longer could give hawks and doves on the Governing Council a possibility of finding increasingly rare common ground, he said.

‘Fine-tuning will give you more precision in the decision, and then you compromise that with the length of the period in which you do the fine-tuning’, he said. ‘We can move in smaller steps and we can adjust with the time.’

The Governing Council will in any case have little choice but to abandon its previous discussion of relatively minor issues and shift to a more fundamental discourse embracing a thorough assessment of the impact of policy steps taken to date, this person said.

‘Over the last few months, I saw the discussions of the Governing Council as deciding "small things", like 50 or 75bp, or 25 to 50 in July, or what kind of forward guidance to communicate, but the idea was absolutely clear in terms of the direction and how far we are from our target’, this person said.

The ECB having rapidly tightened by several hundred basis points to date, ‘I think there is very little discussion that we are now in restrictive territory’, he said. ‘I think it is also consensus that at least we are close to the point at which we need to assess the implications of everything that we have done.’

This person was speaking before Austrian National Bank Governor Robert Holzmann in an interview published Monday issued a strong call for four more 50bp rate hikes and flatly dismissed the idea that the ECB was even close to being in restrictive territory.

Still, with Holzmann far from the first Governing Council member to stake a pronounced public position, this person had a ready interpretation of such contributions to the debate.

‘Everybody was on board until now with the direction of travel, and for obvious reasons now, everybody will have different views’, he said. ‘So now we will start to have this discussion. And people on both sides are kind of putting their troops, their line of argument out there.’

Some Council members will see the ECB as no longer very far from the terminal rate, he insisted.

‘We are approaching the point where we need to make this assessment, to recalibrate the speed, the terminal point, the sustainability of the interest rate path and this kind of thing’, he said. ‘Which by the way, I find fairly obvious, and the US is doing it.’