Exclusive: ECB Insider: I’d Support Another 50BP Hike in May, Unless Economy or Core HICP Soften

17 March 2023

Exclusive: ECB Insider: I’d Support Another 50BP Hike in May, Unless Economy or Core HICP Soften
- ECB insider: ‘No doubt that we are still in a tightening mode’
- ECB insider: No hurry to decide on next move, can wait until the time comes
- ECB insider: 50bp hike not much when real interest rates clearly negative
- ECB insider: 4.5% terminal rate only if inflation turns out unexpectedly persistent

By David Barwick – FRANKFURT (Econostream) – Barring a clear weakening of the economy or core inflation in the next six weeks, the European Central Bank should hike by another 50bp in May, in the view of a Eurosystem insider who spoke to Econostream recently.

According to this person, the ECB’s bias remained clearly in the direction of yet tighter policy, but the data-dependent approach meant being open to all developments, including those unexpected, until it came time for the Governing Council to make a decision.

On the basis of current information, ‘I would say we will need to do another 50bp in May’, he said. However, he said, were spot readings of core inflation to turn down clearly or were euro area economic activity in general to suddenly sag, then a deceleration in the pace of tightening to just 25bp would be warranted.

‘I don’t expect to see this [pronounced weakening of core inflation or the economy], but it can happen’, he said. Data can always surprise in any direction, he reasoned.

There were, he noted in endorsement of the data-dependent approach, many data points on the calendar over the next six weeks, but ‘no reason to rush’ in deciding monetary policy’s next move. ‘I think there is no doubt that we are still in a tightening mode, but as far as the next move, there is nothing to be said now - we can wait until May’, he said.

In any event, the current level of core inflation meant that real interest rates remained firmly negative, he argued, so that a 50bp hike even now would not be that much.

Like his colleagues, this person declined to speculate as to the terminal rate of the current tightening cycle, but expressed scepticism that the deposit facility rate, which the Council on Thursday decided to increase to 3%, would go as far as 4.5%.

Still, in this regard as well, he did not want to exclude anything, observing that inflation could always prove unexpectedly persistent. Such a development would make thinkable an otherwise less likely terminal rate of 4.5%, he said.

The ECB was not yet facing the risk of doing too much, he asserted. That time would come, and then a more cautious approach to tightening, including an eventual cessation of rate increases, would be appropriate, he said.

If then, without additional moves by the ECB, euro area core inflation were seen to be on a clear downward trend, that would introduce a new phase of the cycle that would ultimately, though not soon, allow the Council to start considering the possibility of easing policy, he said.

For now, the transmission of previous monetary policy steps was limited, he said. This had to do with the fact that corporates were awash in cash, thanks in part to fiscal support measures, he said. As a consequence, they did not need to borrow to invest, he said. Banks as well had plenty of access to liquidity, he added.

These circumstances were making for a weaker impact of monetary policy than one might see under conditions of scarce liquidity, and thus implied a possible need for more tightening than would otherwise be required, he said.