Exclusive: ECB’s Herodotou: Need a Lot More Data Available During 1H for Future Decisions

15 January 2024

By David Barwick – FRANKFURT (Econostream) – It is too soon to contemplate monetary policy easing or even the potential pace at which such easing might eventually take place, according to European Central Bank Governing Council member Constantinos Herodotou.

In an interview on Monday with Econostream (transcript here), Herodotou, who heads the Central Bank of Cyprus, acknowledged positive inflation developments recently, but insisted on the need for more time to be sure that euro area HICP would indeed return to target.

Upside risks to inflation remained, making it premature to declare victory and requiring that the ECB proceed with caution on the basis of incoming data, much of which will only become available throughout the first half of the year, he said.

‘At this point, under the current juncture of the two geopolitical conflicts and the possible supply chain disruption through the rerouting of trade ships away from the Red Sea, any discussion of possible rate cuts would be premature’, he said.

It was ‘important to emphasise that inflation is now on the right decelerating path’, he continued. ‘Nevertheless, more time and further progress is needed to assess and conclude that this path is firm and sustainable enough to bring inflation back to its 2% target.’

Herodotou observed that ‘many wage negotiations in the euro area will take place in the first half of 2024’, leaving this ‘important element’ of ECB decisions unknown for now. It was thus appropriate to watch for these outcomes in the coming months so as to be able to make better-informed policy decisions, he said.

As well, there were other risks in an environment of ‘substantial uncertainty’ that could slow the disinflation process, he pointed out. Citing energy and food prices in particular, he again highlighted the potential of wages – and profits - to interfere. If these did not behave as expected, ‘the disinflation process could be derailed’, he cautioned.

‘Any discussion regarding the time and potency of the first rate cut, as well as the pace of further cuts thereafter, would be premature at the moment and would not constitute a data-dependent approach’, he reiterated.

Still, Herodotou, predicting a soft landing, did not sound gloomy about the economic outlook, despite the apparent weakening of near-term activity. Growth should pick up soon for a variety of reasons, he said, noting ECB forecasts calling for a small recovery in 2024 versus 2023.

‘So, it is fair to say that I have not grown more pessimistic since the September forecasts and any contraction in the economic activity in the euro area in the near term is expected to be shallow and short-lived’, he said.

Estimates of where the neutral rate in the euro area would ultimately wind up were shrouded in uncertainty, he said. ‘Currently the range of the neutral rate estimates is well within the positive territory and certainly higher than in the pre-pandemic period’, he said.

The Governing Council’s decision last month to halve PEPP reinvestments from mid-2024 and then cease these entirely only at the end of the year was ‘welcome’, he said, ‘as I think it strikes a balance between complementing the restrictive monetary policy stance while safeguarding smooth market functioning and, thus, the policy transmission.’

The new steady state level of reserves in the euro area would be higher than that which previously prevailed, he said, in which context a gradual reduction of the ECB’s balance sheet ‘makes sense’.

All in all, he said, ‘our stance on the pace of QT seems well balanced at this juncture.’