ECB Insight: Centeno, Dealt a Stronger Hand, Relishes the Chance To Play It

28 March 2023

By David Barwick – FRANKFURT (Econostream) – As if he heard opportunity knocking, European Central Bank Governing Council member Mário Centeno has been doubling down on his expressions of desire to see his peers start applying patience to the setting of monetary policy.

The three interviews with him that appeared on Monday were not his first such effort, it must be noted, with many of his latest points echoing those already raised in an interview with Italian daily La Stampa published on 6 March.

The ECB’s tightening so far ‘was very rapid’, he said then. The ECB would therefore ‘need some patience to allow these 300bp of increase to have an impact on inflation’.

We called this his ‘habitual dovishness’ and directed our gaze to the criticism he directed on the same occasion toward fellow Council members whose contributions to the public policy discourse, in Centeno’s estimation, would have been better replaced by silence.

Whilst that line of thought also surfaced again yesterday, he has toned it down a bit, as well he might, given that three interviews in one day – at an OMFIF event, to Spanish national daily ABC and to Politico – hardly bespeak reticence on his part.

But under the obvious impression of the banking sector upheavals that started after 6 March (it would be ‘almost a tautology to say that … they have to have an impact on our decisions’), he seems to be betting that other themes are now likelier to fall on fertile ground:

  • The wisdom of a data-dependent, meeting-by-meeting approach under high uncertainty
  • The need to ensure financial stability, underscored by the 2021 strategy review
  • The appropriateness of patiently allowing ongoing tightening to take place as previous, potentially too-rapid hikes feed through over time
  • The absence of any dis-anchoring of inflation expectations or of second-round wage effects
  • The progress towards restoring price stability, reflected in the latest staff forecasts

Provided of course that things don’t get out of hand, we can imagine that a hint of financial instability is from Centeno’s view fortuitous, constituting as it does the doves’ best shot lately at getting their peers to come around.

It would be a mistake to underestimate the potential of the volatility to have just that effect and lead the Governing Council to tread more carefully in May.

To be sure, the hawks lost no time following the 16 March decision in raising anew their clamour for more tightening. In this regard, however, there are a couple of points worth keeping in mind even in the perhaps unlikely event that the next five weeks turn out to bring nothing but smooth sailing on financial markets.

First, a little volatility can make a lasting impression that then winds up looming over the 4 May Council meeting; i.e., the wound may heal but a scar will remain. The renewed turmoil at the end of last week could thus by itself leave some residual nervousness with the potential to tip the scales in favour of a more prudent option.

Should there be another flare-up of anxiety in the interim, this effect would be magnified – policymakers are not going to play with financial stability. A larger bout of market jitters could of course also do a more meaningful portion of the ECB’s tightening for it, but that is a story that we leave for the data to tell.

Second, some of the hawks – whose rhetoric, like that of the doves, is always to an extent just jockeying for an optimal starting position - want to create ample policy space in the run-up to May’s decision, but also understand very well that the odds have risen that developments in the meanwhile might induce them to want to downshift when the time comes.

Put another way, we don’t think the current hawkishness should be interpreted quite as hawkishly as would be appropriate under more benign circumstances.

Third, it is not as though hawkishly inclined policymakers would be left with a completely untenable option following the 350bp of tightening already in the pipeline. They can leave the terminal rate, once reached, in place for longer, or agree to take more time to get there.

This harks back to what we wrote here on 8 March, based on an ECB insider’s comments to Econostream, namely that post-March, ‘an eventual compromise between different sides could involve slowing the pace of tightening but, subject to developments, being open to hiking for longer’.

That outcome may look yet more attractive now than it did three weeks ago.

Finally, in our view, the ECB had practically no choice but to carry through with the 50bp hike it decided in March. There will be no such constraint on 4 May, as the ECB is no longer about to paint itself into a corner by making promises it then feels obliged to make good on.

Ceteris paribus, a freer hand in five weeks lays a more promising foundation for a deceleration.

Going back to Centeno, his relative loquaciousness in recent days makes sense. We assume he feels that his arguments have a significantly higher chance of gaining traction. Whilst a great deal will ultimately depend on the data flow over the next five weeks – in addition of course to how calm things remain – we have to agree that his hand has become stronger.