Exclusive: ECB Insiders Seen Generally Tilting Towards 25BP, but Very Willing to Discuss 50BP

25 April 2023

Exclusive: ECB Insiders Seen Generally Tilting Towards 25BP, but Very Willing to Discuss 50BP
- ECB insider: Won’t be surprised if we hike by 25bp, but wouldn’t exclude another outcome
- ECB insider: Risk of doing too little currently still greater than the risk of doing too much
- ECB insider: Would require a ‘quite negative’ April inflation surprise for me to support 50bp

By David Barwick – FRANKFURT (Econostream) – The European Central Bank on balance seems likelier next week to hike by 25bp rather than the closest other option of 50bp, based on the views of a number of Eurosystem insiders who recently made these known to Econostream.

Still, even allowing for adherence to the ECB’s intention to decide only when the time comes and on the basis of the data then available, the larger move was by no means excluded, especially if incoming data support it. In effect, we draw the conclusion that the May 4 decision could hinge on the euro area inflation numbers to be published two days previously.

To be sure, of some half dozen Council members, only one made absolutely no bones whatsoever about his preference for the larger rate hike, with even this person however agreeing that a benign inflation surprise for April could be grounds to reconsider his hawkish preference.

Of the rest, another fairly hawkish member was particularly insistent about the importance of discussing the option of a 50bp hike. Though he did not commit himself explicitly to supporting such a move, it was evident that he was leaning in that direction.

‘In the current situation, the risk of doing too little would still be greater than the risk of doing too much’, he said. This would naturally change ‘at some point’, he said.

He was clearly not enamoured with the idea of instead hiking by only 25bp but for longer, though he conceded that this was ‘one possibility as well.’

Excluding the 50bp option would simply be inconsistent with the ECB’s meeting-by-meeting approach, he reasoned. But more fundamentally, underlying measures of HICP remained concerning despite tamer headline inflation and thus warranted consideration of another large step, he said.

Still, even this person rejected a continuation of 50bp hikes beyond May, given the need ultimately to fine-tune policy via smaller moves. Indeed, he said, pausing after a May hike was possible, to be followed by another hike or not, as circumstances dictated.

Two other Council members who have sided unambiguously with the hawks since before the hiking cycle began were decidedly less enthusiastic than their colleague about a hike on the order of magnitude of the recent past, though they, too, wanted and expected another 50bp increment to be on the table.

One of the latter directly confirmed that he was ‘[a]t this moment’ favouring a 25bp rate increase, arguing vigorously that past policy steps needed to be given a chance to work.

His colleague’s reasoning was the same: ‘It is time now for us to show flexibility and take smaller steps as we wait to see the results of previous measures’ and particularly how these influence the evolution of core inflation, he said.

Vowing to keep an open mind up to the Council’s meeting, this person nonetheless assessed a 25bp outcome as somewhat more probable. It was ‘quite likely’ or, as he quickly qualified, in any case he ‘would not be surprised if we end up with a 25bp increase, but I would also not exclude any options at this point.’

It would take a ‘really negative surprise’ with respect to April inflation for him to prefer 50bp, he said. ‘It would have to be quite negative.’

Another Council member, generally moderate but supportive of the ECB’s course to date, was more clearly unlikely to support a 50bp hike, based on current knowledge, being inclined to back 25bp moves at each of the next two meetings.