ECB Insight: Option of 25BP Hike Leads, but Tally of Council Underscores Risk of Surprise

27 April 2023

By David Barwick – FRANKFURT (Econostream) – Under the European Central Bank’s data-dependent, meeting-by-meeting approach to setting monetary policy, the classification at a given moment of Governing Council members’ respective likelihood of supporting one option or another is subject to an obvious and big caveat.

Namely, the relatively heightened chance that last-minute changes of heart on the basis of new information could upset the apple cart.

The ECB’s bank lending survey – of special interest in light of financial market tensions – and of course April inflation data, both still to come, have particular potential to induce a rethink on the part of the one or the other monetary policymaker.

As well, in some cases it is less clear than usual just how a given policymaker is thinking, given the unmistakeable effort – especially at the level of the Executive Board – to take the new approach seriously and be parsimonious with otherwise forthcoming verbal clues.

We note with interest that some Council members firmly in the camp of the hawks last year - when we did similar reviews with respect to outsized rate hikes – are now less inclined to support the hawkish option, and that the faction of those we call ‘clearly against 50bp in May’ includes not just the usual doves, but also none other than Banque de France Governor François Villeroy de Galhau.

The latter has been surprisingly vocal about his desire to see any hikes become more ‘limited’ in size, and such prominent support – besides perhaps indirectly indicating his expectations, as he would presumably not wish to get behind the losing side – could sway fence-sitters.

Still, as we head into the quiet period, we count 10 Council members clearly, probably or possibly in favour of a large hike next week. With no symmetrical category ‘possibly against 50bp’ and five members in the group whose preference is least clear, 11 are deemed clearly or possibly against 50bp. It thus seems that it would take little to tilt the outcome in a particular direction.

Moreover, in classifying Council members, we may have been cautious in a way that could relatively understate the degree of support for 50bp. In particular, we would understand if another ECB observer were to argue that anyone we have here classed as merely ‘possibly’ in favour of 50bp should actually be considered as likely to support that option.

That said, it must also be taken into account that if ECB Chief Economist Philip Lane proposes 25bp, which we think would be in line with his own preferences, then that by itself should significantly improve the chances of this being the outcome.

Finally, we note that although both a pause and a 75bp hike in May are tail risks, the probability of the former is larger than that of the latter. Those probably or clearly against 50bp are understood to instead want 25bp, though at least Banco de Portugal Governor Mario Centeno has advocated including the option of a pause (and excluding 50bp). Nobody has advocated that 75bp be discussed.

Ultimately, anyone who can wait until May 3 to place a bet might be well advised to do just that (though we don’t give advice).

Clearly in favour of 50bp in May:

Austrian National Bank Governor Robert Holzmann:

  • 12 April 2023: ‘The persistence of inflation currently argues for another 50bp. If we do not act vigorously enough now, the inflation problem will only increase and we will end up being even stricter.’

Probably in favour of 50bp in May:

Dutch National Bank Governor Klaas Knot:

  • 20 April 2023: ‘We are now in what I would call mildly restrictive territory with policy rates but inflation is not mild. Inflation is still much too high. Mildly restrictive territory will not be enough to counter an underlying inflation rate that has been creeping up towards 6%. We need a sufficiently restrictive stance. Where is sufficiently restrictive, I don’t know but clearly not where we are today.’

Bundesbank President Joachim Nagel:

  • 14 April 2023: ‘…I believe that risks to price stability are currently tilted to the upside. On that note, it is not a given that we will return to price stability over the medium term. Therefore, I do not think that our job is already – or even mostly – done. Rather, in my opinion, further interest rate hikes will be required.’

Latvijas Banka Governor Mārtiņš Kazāks:

  • 13 April 2023: ‘‘The risk of not doing enough in terms of raising rates in my view is significantly higher than doing too much. … At least in my books, I don't see any reason to slow down anytime soon in terms of interest rate increases, because inflation does remain very high. Yes, we've seen some improvement in terms of the headline, but core is still very persistent. … I would certainly not exclude 50bp, by all means interest rates still need to go up.’

ECB Executive Board member Isabel Schnabel:

  • 24 April 2023: ‘…core inflation continues to surprise on the upside. It shows a very strong momentum, and it stands at a historical high. Given the persistence of underlying inflation, plus the very strong momentum in food inflation, it's far too early to declare victory on inflation. People talk a lot about a potential peak in core inflation. I would not overemphasise the peak as such, because what really matters is that inflation is returning to our 2% target over the medium term. We need to see a sustained decline in core inflation that gives us confidence that our measures are starting to work.

Possibly in favour of 50bp in May:

National Bank of Belgium Governor Pierre Wunsch:

  • 19 April 2023: ‘Compared to what we had in the projections in December, we’ve had four readings of core that were higher than expected. A fifth reading would be a quite strong argument to do more. And the market expectations of the terminal rate are now at 3.75%. If the question is how we get there, one option is quite slowly, but another way would be to hike by 50bp and then slow down.’

National Bank of Slovakia Governor Peter Kažimír:

  • 17 March 2023: ‘Inflation risks exist on both sides, but in my view the risks are much greater to the upside. … In my opinion, the current view of the future development of inflation over the entire horizon of our forecast period speaks clearly in favour of the need to continue.’

Banka Slovenije Governor Boštjan Vasle:

  • 13 April 2023: ‘It’s too early to decide the pace of our next move but the options I’m considering are a 25 and a 50bp increase. Headline inflation is coming down but we are all focused on core inflation, which is still moving in the wrong direction.’

Croatian National Bank Governor Boris Vujčić:

  • 26 April 2023: ‘Reducing inflation always comes with some costs due to higher interest rates. But those costs are lower if we do it decisively now, rather than letting inflation build into expectations. Because in this case interest rates will have to stay higher for longer than if we do it sooner and faster.’

Central Bank of Luxembourg Governor Gaston Reinesch


Bank of Finland Governor Olli Rehn:

  • 21 April 2023: ‘I am well aware that even now some are demanding a brutal backstabbing for inflation, shock therapy in the style of the early 1980s. Could it be that every central banker has a little Paul Volcker? But the 2020s are not the same as the stagflationary 1970s. By staying consistently on track to stabilize inflation to the 2% medium-term objective, we can avoid the economic shock therapy of the Volcker era. The near-term economic development may be more subdued due to the rise in interest rates, but the risk of a long-term economic crisis is lower when inflation is stabilized.’

Central Bank of Malta Governor Edward Scicluna:

  • 13 April 2023: ‘…once the inflation has peaked, and the core inflation is expected to peak as well, you could see, sort of, the final push is not that far. … You could see the forces on both sides, making it a difficult decision. It becomes more and more difficult each time. That's a good sign that, you know, the end of the tunnel is not that far.’

ECB Executive Board member Frank Elderson:

  • 30 March 2023: ‘Our latest projections, which were finalised in early March … are based on technical assumptions with a cut-off date of 15 February and therefore do not take into account recent market developments. This is precisely why we wanted to make our reaction function clear – to show that we have to take decisions based on the incoming data. The data evolve, and our assessment along with them. That’s why we cannot pre-empt today any decision to be taken in May.’

Central Bank of Ireland Governor Gabriel Makhlouf:

  • 04 April 2023: ‘…our monetary policy tightening is taking effect, but we must remain steadfast, and ready to act as required, to ensure we reach our target over the medium-term. Policy rates will need to be kept at a restrictive level to dampen demand. This will help to re-set the balance between supply and demand in the economy and bring down inflation. I am monitoring closely recent financial market volatility, but I am also confident that the banking sector is more resilient to a wide range of potential adverse shocks. Short-term volatility in financial markets does not translate into risks for the macroeconomic outlook, as monetary policy is concerned with achieving price stability in the medium term. Nevertheless, the Governing Council will be mindful of developments in the banking sector, and financial stability more broadly, as we continue to assess our monetary policy stance.’

ECB President Christine Lagarde:

  • 14 April 2023: ‘We expect euro area inflation to continue to fall, as lagged price pressures fade out and tighter monetary policy increasingly dampens demand. However, historically high wage growth, related to tight labour markets and compensation for high inflation, will support core inflation over the projection horizon, as it gradually returns to rates around our target. This outlook remains surrounded by considerable uncertainty, with both upside and downside risks. Stronger than expected pipeline pressures or higher than anticipated increases in wages or profits could drive up inflation, while financial market tensions and falling energy prices could lead to faster disinflation. At the same time, most measures of longer-term inflation expectations currently stand at around 2%, although they warrant continued monitoring.’

Probably against 50bp in May:

ECB Chief Economist Philip Lane:

  • 25 April 2023: ‘The markets and banks are starting to charge much higher interest rates. As a result, for households we are seeing a strong fall in demand for mortgages. For firms, we are seeing a substantial drop in investment. The interest rate increases have also supported a strong appreciation of the euro. All of these impacts will continue to filter through the economy – this is going to continue to play out.’

ECB Vice President Luis de Guindos:

  • 01 April 2023: ‘In this context of heightened uncertainty, our approach to bringing inflation down to our 2% medium-term target will remain data-dependent. As we clarified in our latest press conference, our future policy path will be determined by our assessment of the inflation outlook in light of the incoming data, the dynamics of underlying inflation and the strength of monetary policy transmission. We believe that headline inflation is likely to decline considerably this year, while underlying inflation dynamics will remain strong.’

Central Bank of Cyprus Governor Constantinos Herodotou:

  • 26 April 2023: ‘We are beginning now to see the first signs of the impact in the real economy and ... it's already seen in the headline inflation, even though core inflation is sticky, so we still have to work on that. … [Financial market tensions] may have an additional impact on financing conditions, in addition to our monetary policy, so we need to gauge that and see how it could potentially complement or at least how it contributes to the monetary-policy stance.’

Banco de España Governor Pablo Hernández de Cos:

  • 10 April 2023: ‘…if the baseline scenario in the March projections is confirmed, we will still have ground to cover to make sure that inflation pressures are stamped out. However, as I have said, these projections are subject to various sources of uncertainty. And this is why we are emphasising that the rate path is data-dependent. This means, ex ante, that we are neither committed to, nor finished with, further rate hikes.’

Bank of Lithuania Chairman of the Board Gediminas Šimkus:

  • 06 April 2023: ‘We have considerably increased interest rates in a pretty short period of time. And it’s very clear that accommodative monetary policy was not needed anymore. What we’ve done, not only with the rate hikes but also with the balance sheet reduction, is already having an impact. But the peak impact occurs with a lag of a year or even longer.’

Eesti Pank Governor Madis Müller:

  • 23 March 2023: ‘Looking at how quickly and sharply the interest-rate increases have taken place in less than a year, I dare say the bigger part of this is behind us and now it is a time for adapting and coping.’

Clearly against 50bp in May:

Bank of Greece Governor Yannis Stournaras:

  • 21 April 2023: ‘Inflation has stopped increasing since October… From then until today, however, it has fallen a lot. … we expect deceleration close to 3% at the end of the year and even more in 2024. Therefore, we are clearly on the path of reducing inflation. … We expect [the deposit facility rate] to go up a bit more, but we are nearing the end of the hikes.’

ECB Executive Board member Fabio Panetta:

  • 22 March 2023: ‘…our tightening must be calibrated prudently. This is because it is already having a strong impact on financing conditions and because we want to avoid undesirable financial volatility. And this prudent approach holds truer still as our policy rates move more firmly into restrictive territory, inflationary forces ease and the risks to the inflation outlook become balanced. At times like this, abrupt policy moves are not necessary.’

Banco de Portugal Governor Mario Centeno:

  • 15 April 2023: ‘…for the May decision, either zero or 25 are numbers that are feasible … I don't see any reason whatsoever to do more. … we target headline inflation - we don't target core […] we have to follow core closely because it may reveal pressures ahead. But so far, given the lag in which the shocks to headline are transmitted to core, both positives and negative, I still don't see reasons to be very concerned.’

Banca d’Italia Governor Ignazio Visco:

  • 20 April 2023: ‘Now, the big problem here is actually that we have two risks. One of doing too much, and the other of doing too little. Some of my colleagues say it is better to err on the side of doing too much. I think it’s wrong. I think we don’t know enough about that, and the risk of doing too much is at least as large as that of doing too little.’

Banque de France Governor François Villeroy de Galhau:

  • 24 April 2023: ‘Most of the effects to come for the economy will come from what is already in the pipeline — we’ve completed most of the path. … There may be a need for a few more hikes. But in my opinion, they should be limited both in number and from now on in their size also.’