Exclusive: Transcript of Interview with ECB Governing Council member Scicluna on 21 March 2023

22 March 2023

Exclusive: Transcript of Interview with ECB Governing Council member Scicluna on 21 March 2023
- Scicluna: Ramifications of bank turmoil to be felt for some time, also in Europe
- Scicluna: ‘We strongly believe in the robustness and resilience of our system’
- Scicluna: If we don’t see core inflation peaking, then our job is to continue attacking inflation
- Scicluna: Would be presumptuous for me to say now that I’ll want 50bp in May; must see data
- Scicluna: ‘Nowhere near’ the wage-price spiral we’ve had in the past
- Scicluna: Updated forecasts appeared to us to be out of date the same day
- Scicluna: If core inflation rises, then those who are for tightening will get the upper hand
- Scicluna: ‘Wouldn’t be highly concerned with the results we’re getting from wage settlements so far’
- Scicluna: ‘No indications that we’re seeing’ the light at the end of the inflation tunnel
- Scicluna: Mopping up liquidity is another way to subdue inflation
- Scicluna: Last week’s decision gives sense of stability; you don’t create more stability by hesitating

By David Barwick – VALLETTA (Econostream) – Following is the full transcript of the interview conducted by Econostream on 21 March 2023 with Edward Scicluna, Governor of the Central Bank of Malta and member of the Governing Council of the European Central Bank:

Q: Governor, in view of recent developments, how would you regard the possibility of a pause and then a resumption of hiking?

A: Since what’s happening around us is turmoil, it’s quite valid to ask whether we’re going to take a pause to await further developments. We cannot ignore such turmoil. The ramifications will be felt for some time, including in Europe’s banking system. But the major point is that both events – the two banks in the US and the one bank in Switzerland – occurred outside the euro area. We strongly believe in the robustness and resilience of our system, which we conscientiously reinforced in the aftermath of the Global Financial Crisis. In setting monetary policy, we will as always look at the market situation at each meeting, and we’ll be even more attentive than we already were. But if we had wanted to pause, then probably last week would have been the time, when a lot of things were happening. And we naturally discussed it at length, but the upshot was, why should we? We took what we thought was the correct decision, despite what was happening around us, because we thought that it was appropriate to carry on with our job in view of new factors we had on the table, such as the updated staff forecasts.

Q: One of your colleagues on the Council yesterday described the ECB as “close to the end of the tightening cycle”.

A: My colleagues are quite a diverse group. Some think that there is still a way to go, and others see us as already there. I’m very pragmatic and for that reason in neither camp. In this uncertain world, I don’t feel that we can be sure enough about the future to say how many hikes of what size we still need or, the other way around, that we’ve reached the end already even though core inflation is still rising. We can hope it peaks, but we still have to see that, and if we don’t see it, then our job is to continue attacking the monster of inflation or whatever you wish to call it.

Q: It does sound though like there’s still a high degree of consensus about the need to do a little bit more.

A: We’re pleased with headline inflation coming down. Hopefully it will affect core inflation, though with a lag, but we haven’t reached this point yet. And core inflation is something we have a mandate to address. We don’t have instruments to control Putin. But core inflation is the measure of inflation that is associated with the fear of a dis-anchoring of expectations and so on, so we take it very seriously.

Q: What if it keeps rising, and we still have market turmoil? How do you strike the balance?

A: We could get into such a dilemma. The Bank of England did. But that’s why we have a toolkit. We’ve used it in the past and we can use it in the future. We never said that the toolkit is permanently closed and we’re blindly tightening. We are flexible. One must never be rigid nowadays.

Q: Are there any tools you would prefer to use if financial stability concerns required it?

A: We have already started by coordinating with other central banks to enhance the provision of US dollar liquidity. That’s quite important. And we have other instruments we’ve used in the past that are suitable for providing liquidity to those who need it. They will be standing by. The ECB is not embarrassed to admit it when the circumstances require a change of course or to stop and take a pause if need be.

Q: What would it take for you to support hiking by 50bp in May?

A: We don’t know how core inflation is going to behave. This will make a big difference. And not just core inflation per se, but supporting evidence of all kinds. It would be presumptuous at this stage to say I would go for another 50bp. We have to do what is required, and as the time draws closer, then you start forming a sense of whether the peak is next door or still quite far away. Definitely, when we took our last decision we didn’t say that we’re following any particular path. And nothing has improved in terms of the uncertainty. If anything, it’s cloudier. So, prudence dictates a bit of silence and some meditation to get a better feel for things.

Q: Still, the bias is clear. President Lagarde said the ECB still had ground to cover.

A: We’re not saying that we have three more hikes in a row, for example, but neither are we saying that we’re stopping. If the data give us reason to continue fighting inflation, then we have to do what is required, even if it’s another 50bp. So, I’m not excluding it, I’m just not saying that as of now I can already see the need.

Q: But 50bp or 25bp is what it comes down to.

A: Yes, of course.

Q: You mentioned all the information that will be coming in. Is the Bank Lending Survey all that useful still, given that companies have so much cash they can often finance their investments without any borrowing, thus limiting the effectiveness of policy transmission?

A: In Malta, for example, all the excess liquidity is indeed making the transmission weak. But overall, transmission is working so far in most Eurosystem countries. The point is, you can tell that our monetary policy impulses are arriving at the address we’re sending them to, so to speak, but the question is, how much is it affecting inflation? Because there are currently four main factors pushing or pulling inflation. On the one hand, higher interest rates and the decline in energy prices are helping. On the other hand, wages and fiscal policy are boosting inflation. Fiscal policy is not in our hands, even if we’re repeatedly talking about the “3 t’s” – the need for these measures to be temporary, targeted and tailored. As for wages, looking at the experience so far, there’s nothing like the wage-price spiral we’ve had in the past. We’re nowhere near that. So, we have to monitor developments closely, but I wouldn’t be highly concerned with the results we’re getting from wage settlements so far.

Q: The updated forecasts were based on underlying assumptions using market expectations that were no longer valid last week. What does that mean for the usefulness of the forecasts?

A: They were out of date on that same day. That’s how they appeared to us. One could have said, “Just put them aside.” But then when we cooled down and woke up the following day, we came back to our senses and said, “Look, what’s going on is exogenous. Let’s look at the system we’ve built over the years and the institutions and regulations and so on. Are we going to be weak-kneed just because of outside events? Let’s continue with what we’ve prepared for the simple reason that we believe in our system.” We’ve built a resilient system, we believe in it, and if things happen, we’re ready to provide liquidity and deploy the tools in our toolkit. And so, we decided as we did.

Q: How do you see the balance of risks now between doing too much and doing too little?

A: The higher you go, the more you start to question the balance of risks between continuing to tighten or not. Eventually you reach that point, and the closer you get to it, the more you feel it. We’re not where we were three decisions ago, but we haven’t yet reached where we’d like to be. As we go, there will be more voices in favour of slowing the pace. But we’re not there yet. And if core inflation goes up, then those who are for tightening will get the upper hand, for sure. Because they will have a strong argument. Without that, they will be in a weaker position. When core inflation is seen to have reached the peak, we would be seeing the light at the end of the tunnel.

Q: Since it’s only March now, do you think there’s a chance that the light will be bright enough to start easing policy a little bit at the end of this year?

A: It’s a question of forecasts and surprises. Before, we were surprised the wrong way – we said high inflation was transitory and that because it was due to energy, core inflation would not be strongly affected. So, with energy commodity prices coming down, you might think you are seeing the light at the end of the tunnel, but it’s imagination. We’re not seeing it yet; there are no indications that we’re seeing it. We’re not excluding that we will see it, and if there are indications in upcoming meetings, we’ll be ready for it. For example, we’re seeing commodity prices coming down and we know that the effect is subject to lags. We have been tightening our monetary policy and we know that has its own lags as well. So, it’s just a question of waiting to see these things being reflected in developments.

Q: How worried are you about expectations at the moment?

A: It doesn’t help when the inflation is coming from food. People who go to the shop and see how much food costs don’t take a weighted average across a wide basket of goods and services. They see that food has gotten more expensive, and this makes a big impression. And for me, inflation expectations are what results in that core inflation, and that’s why we have to be credible. Because if people really have faith that we’re fighting this war against inflation and we’re serious about it and determined, it helps. We cannot waver.

Q: What if core inflation remains high while headline inflation weakens, so that you still have to tighten policy? Won’t it be difficult to sell additional rate hikes to the public?

A: We have other instruments besides the rates. We have the mopping up of liquidity as well. We have been quite cautious in that regard, but it is another way to subdue inflation.

Q: How has QT been going?

A: So far, it’s gone quite smoothly, and I’m happy it’s been like that. Especially now, as we have to see what the demand for liquidity is. But compared to the Fed and the Bank of England, it’s been not just smooth, but very smooth. Sovereign bond yields have been moving in line with the risk-free rate, and sovereign spreads so far have remained contained. We still have a full quarter between now and June, so we have ample time to decide on the right pace. In principle, we should do as much as we can without causing any harm. We have to be careful.

Q: Don’t you have to be more careful now because of what’s happened in the last 10 days?

A: Yes, the answer is yes. Especially so if the effect is found to be deflationary.

Q: Do you consider monetary policy to be restrictive yet?

A: We’re restrictive, but maybe not enough to compensate for the expansionary fiscal policy. You can’t look at monetary policy on its own. Let’s see how fiscal policy develops, and whether there will be an agreement on a set of fiscal rules, and then we can say overall whether policy is restrictive.

Q: HICP inflation is projected at 2.1% in 2025, with core at 2.2%. Is this not close enough to price stability to be considered price stability?

A: We are operating under very high uncertainty and with a lot of risks. And whilst we’re getting to that in 2025, we continue to make certain policy decisions. In that sense, it’s a moving target. What were the assumptions of the model when the projections were made? Immediately, the next day, things start changing. So, we go towards the target, but we are not taking anything for granted. We have to continually update the projections and take into account new data. There are so many unknowns and uncertainties. It’s not a straight line we can follow with no hands on the wheel.

Q: Would you consider loosening the TLTRO conditions again?

A: If circumstances require it, we would. We still have to see whether there are going to be requests and a need, and we’ll discuss that accordingly. We’re not embarrassed to say, “Let’s stop or go into reverse”, if there’s a need. We want to ensure price stability, but also financial stability at the same time. So yes, we will stand by with whatever is required.

Q: Is one or the other of price stability and financial stability more important? How do you make the trade-off?

A: It’s price stability, definitely. But I think price stability and financial stability go hand in hand. We can’t do one without the other. You really have to see them together.

Q: If you hadn’t already more or less promised 50bp for last week, and were already deciding meeting by meeting on the basis of data, what do you think last week’s decision would have been?

A: The decision was based on the fact that we believe in the Eurosystem and its resilience. If the turmoil had been closer to home, one could have delayed the decision by a week, say. But there was no need. I don’t want to make it look like it was easy, though. The settlement wasn’t until Sunday and things could have blown up. So, no, it was not easy. But the decision gives a sense of stability. There was enough instability. You don’t create more stability by hesitating. So, we believed that it was the right decision and that the system can withstand it. Based on that, we moved.