Exclusive: ECB Insider: A Rate Cut Is Our Likeliest Next Move, But Won’t Come Soon

27 November 2023

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s next interest rate move is likelier to be a cut than a hike, but it is unreasonable to expect the easing to come soon, in the view of a Eurosystem insider who spoke to Econostream recently.

The ECB ‘should be open’ to respond to whatever story incoming data tell, this person said. If disinflation continued as projected, then monetary easing was the only logical outcome, he said. If inflation encountered resistance on the way down, then renewed tightening could be needed, he said.

That however should not be construed to mean that the two scenarios had equal probabilities, let alone that the latter, namely another rate hike as the next move, was the likelier, he emphasised.

‘I would attach a greater probability to a cut than to a hike, for the simple reason that if our projection materialises, then this is clearly more consistent with a cut as the next move’, he said. ‘Any other assessment would imply that we had no confidence in our own projection.’

This did not mean that there were no risks, he made quite clear. ‘Very strong’ labour markets and still-high wage pressures meant that the current ‘optimistic’ scenario ‘might not’ materialise, he said.

In this context, this person said he agreed with ECB Chief Economist Philip Lane’s insistence on the need to wait until well into 2024 for clarity. It could not be assumed that economic weakening would inevitably dampen wage developments sufficiently for ECB purposes, ‘because it hasn't happened so far’, he argued.

‘The economy already weakened, and the labour market mostly just shrugged it off’, he said. ‘So why would we assume something that did not materialise so far?’

It was thus ‘absolutely consistent’ not to close the door to any more rate hikes, he said in explanation of why ECB rhetoric remained adamant about the possibility of further tightening. Still, he maintained that this reflected high uncertainty and not a hawkish bias in the sense of another hike being favoured.

A rate cut would only be possible ‘once we get all the data, not before’, he said. ‘It would be premature to make any move before we are very confident that the disinflation process will continue as expected.’

The ECB would approach the interest rate turnaround with the caution born of experience in case its central scenario were to be subject to a sudden upset, he said. Confidence in the outlook was likely to come only when the wage data available in the spring could be incorporated in the ECB’s June macroeconomic projection exercise, he said.

To be sure, there was no excluding a first cut during the first half of next year, he said. ‘I wouldn’t rule out anything’, he said. ‘But I would consider it very improbable.’

For now, the ECB, not being entirely sure, was not in a position to declare the terminal rate officially reached, he said. ‘It will gradually become clear whether we’ve reached the terminal rate or not’, he said.

In all probability, there would be clarity on this point before the first rate cut, so that the cut would not come as a ‘sudden surprise’, he said.