ECB Insight: Governing Council Tally Shows ‘Premature’ Camp Still Leading, but Not Overwhelmingly

16 February 2024

By David Barwick – FRANKFURT (Econostream) – A member-by-member review of the European Central Bank Governing Council with respect to the preference to tackle policy easing more or less slowly reveals that the camp of those continuing to see interest rate cuts as premature dominates, though the opposition has gained ground.

Such an exercise is fraught with uncertainty. For one thing, public comments can fail to reflect where the policymaker stands on a specific question. For instance, many or most of those in the group we call ‘clearly or probably in favour of cutting later’ have at some point acknowledged the progress in disinflation, but we don’t understand this as an embrace of a March or even April rate cut.

For another, this review is a snapshot at a precise moment in time. Developments at any subsequent moment, including but hardly limited to scheduled data releases, can lead to a shift in thinking.

Moreover, it can be difficult to separate a policymaker’s ‘fundamental’ position from the position he feels he must express as representative of a body including 25 others. This is particularly true of Executive Board members.

For example, does ECB President Christine Lagarde merely strive at any given moment to reproduce the ‘aggregate sentiment’ of the Governing Council (with the subset of the Executive Board perhaps more heavily weighted), meaning that she is going with a flow subject to sudden change of direction?

Or, in the present case, can she be expected to be the last one standing between the Council and the danger of what she calls a ‘hasty decision’?

We consider the former alternative to be closer to the truth, which would actually make the views she articulates a bellwether of ECB policymaking, giving them particular value. Still, we classify her in the following with the rest of her colleagues, and in general leave it to the reader to note where particularly influential Council members stand.

Much more could be said on these subjects, but without further ado, we wind up with 12 Governing Council members in the group of those clearly or probably in favour of cutting later.

Another four are uncommitted or of very unclear position, but are normally hawkish, while three Council members are in the camp of those uncommitted/unclear but usually dovish.

That leaves seven we deem ‘clearly or probably in favour of cutting sooner’.

In other words, assuming the least inclined to cut remain so for the time being, then those most inclined to start easing would have to win the support of all Council members of unclear position, including the relatively hawkish ones. This is unlikely.

In the end, a March rate cut was improbable anyway, so we would not argue that this is the issue. The issue is more one of April or June and whether the 7 March monetary policy meeting will at least be an occasion for the ECB to stop branding rate cut talk – not actual reductions of key interest rates - as premature, effectively raising the odds of an April cut.

Our poll may be consistent with a reasonable chance of this happening. We see that already, a substantial minority are amenable to rate cut talk, and discussing the ECB’s approach to the inevitable, in the interest of making the transition to that phase as smooth as possible, shouldn’t be as alarming to rate cut opponents as actually considering whether to make a move.

But again, there are data yet to come that can and probably will point in one direction or another, arguing for caution when drawing conclusions.

Clearly or probably in favour of cutting later:

Bundesbank President Joachim Nagel:

03 February 2024: ‘We mustn’t jeopardise what has been achieved by reducing the dose too early. That’s a challenge. As I see it, the price outlook still isn’t clear enough: that’s why interest rate cuts are premature at the current juncture.’

Dutch National Bank Governor Klaas Knot:

28 January 2024: ‘We now have a credible prospect that inflation will return to 2% in 2025. The only piece that's missing is the conviction that wage growth will adapt to that lower inflation.’

Austrian National Bank Governor Robert Holzmann:

08 February 2024: ‘There is a certain probability that there will be no rate cut at all this year or only at the very end of the year. In the past it has been shown again and again that combating inflation and the time needed for this are often underestimated.’

Latvijas Banka Governor Mārtiņš Kazāks:

09 February 2024: ‘That dragon has been pushed to the ground, but it has not been killed yet. The nature of inflation is insidious. Therefore, we will need to be patient a while longer.’

National Bank of Belgium Governor Pierre Wunsch:

08 February 2024: ‘We would already be talking about reducing rates if it were not for wages. And I would be completely fine with it. But we have a problem: we have still wages running at a level which is not compatible with 2%.’

Eesti Pank Governor Madis Müller:

26 January 2024: ‘[A]s a central banker, I have to admit that it is still too early to talk about the next interest rate decisions in a definite form. For this, there is simply too little confidence that the upward pressure on prices has eased to a sufficient extent.’

ECB Executive Board member Isabel Schnabel:

07 February 2024: ‘[R]ecent incoming data do not allay my concerns that the last mile may be the most difficult one. We see sticky services inflation. We see a resilient labour market. At the same time we see a notable loosening of financial conditions because markets are aggressively pricing the central banks’ pivot. On top of that, recent events in the Red Sea have sparked fears of renewed supply chain disruptions. Take together, this cautions against adjusting the policy stance soon. It means we must be patient and cautious because we know also from historical experience that inflation can flare up again.’

Croatian National Bank Governor Boris Vujčić:

04 February 2024: ‘We need to have patience at the moment before we get into the easing cycle, to make sure that wage costs aren’t translating into sustained wage pressure.’

ECB Vice President Luis de Guindos:

14 February 2024: ‘While we are heading in the right direction, we must not get ahead of ourselves. It will take some more time before we have the necessary information to confirm that inflation is sustainably returning to our 2% target.’

National Bank of Slovakia Governor Peter Kažimír:

29 January 2024: ‘I stress that patience is essential before making pivotal decisions concerning the timing of the cut in our interest rates.’

Bank of Finland board member Tuomas Välimäki:

26 January 2024: ‘[R]estrictive monetary policy is still called for. Preserving the credibility of our inflation anchor is one of the fundamental reasons for us to keep our heads cool and not jump the gun. The history of central banking shows that false starts can be costly. We need to avoid declaring victory over inflation prematurely and we need to have enough evidence of healthy core inflation dynamics before we can ease our policy stance.’

ECB President Christine Lagarde:

14 September 2024: ‘The last thing that I would want to see is us making a hasty decision to see inflation rise again and have to take more measures.’

Uncommitted/unclear but normally hawkish:

Central Bank of Luxembourg Governor Gaston Reinesch

Bank of Lithuania Chairman of the Board Gediminas Šimkus:

26 January 2024: ‘The further we go into 2024, the greater the chance of a rate cut. … The increase in the odds is exponential, not linear.’

Banka Slovenije Governor Boštjan Vasle:

26 January 2024: ‘The next steps will continue to depend on the situation as it stands at the time, in particular on the economic and financial data, developments in core inflation, and the effectiveness of our measures. Our decisions will ensure that interest rates are kept at sufficiently restrictive levels for as long as it takes for inflation to return to our 2% target in a timely manner.’

ECB Executive Board member Frank Elderson:

03 February 2024: ‘And as we’ve shown for almost the past two years and demonstrated again last week: we’re determined to bring inflation back down to our target of 2% and we’re making good progress.’

Uncommitted/unclear but normally dovish:

Central Bank of Cyprus Governor Constantinos Herodotou:

05 February 2024: ‘The descent of interest rates should not begin without being absolutely certain because then inflation may return. But neither should there be an unnecessary delay in reducing interest rates in order not to affect economic growth. So we have to rely on incoming data to pick when in 2024 interest rates will start to come down.’

Central Bank of Ireland Governor Gabriel Makhlouf:

14 February 2024: ‘I remain open-minded about the path of our policy rates.’

ECB Chief Economist Philip Lane:

13 February 2024: ‘The trend is very good, we want it to continue and we have some time left. You could hear me and other members of the Governing Council saying that we think the next move is to cut interest rates, but the exact timing depends on the data.’

Clearly or probably in favour of cutting sooner:

Banque de France Governor François Villeroy de Galhau:

16 February 2024: ‘It’s not a question of rushing, but acting gradually and pragmatically can be preferable to deciding too late and then having to over-adjust.’

Banco de España Governor Pablo Hernández de Cos:

11 February 2024: ‘[I]t is important to acknowledge that the disinflationary process in the euro area is now well advanced. This process is expected to continue in the coming quarters, with the latest Eurosystem projections seeing inflation easing to around our 2% objective in 2025 and 2026. And our confidence in the staff projections has increased notably, since the forecast errors have been very small and even negative in recent quarters, meaning that inflation figures have been somewhat below projections. Monetary policy continues to be strongly passed through to financing conditions and is dampening demand, with the risks to the growth outlook remaining tilted to the downside. All in all, we are now more confident that the next interest rate movement will be a cut.’

Bank of Greece Governor Yannis Stournaras:

05 February 2024: ‘Already, for several months, there has been a significant de-escalation of inflation worldwide and, in 2024, the reduction of key central bank interest rates is expected to begin.’

ECB Executive Board member Piero Cipollone:

12 February 2024: ‘[W]ith demand still weak and inflation expectations anchored, there is no need for monetary policy to generate further slack to keep inflation in check.’

Banco de Portugal Governor Mario Centeno:

06 February 2024: ‘The target will be reached in the near future. Let's talk openly: cutting interest rates doesn't just happen when inflation reaches 2%. That's not how it works, because we know that there is a convergence towards that value. And, as long as this convergence is anchored, is firm, and is sustained, monetary policy can and should react.’

Banca d’Italia Governor Fabio Panetta:

10 February 2024: ‘Macroeconomic conditions suggest that disinflation is at an advanced stage, and progress towards the 2% target continues to be rapid. The time for a reversal of the monetary policy stance is fast approaching.’

Central Bank of Malta Governor Edward Scicluna:

15 February 2024: ‘March could be it for all I know. We’ll see how many think that there’s no need to wait for June.’