Exclusive: ECB’s Šimkus: ‘Don’t See Anything Wrong’ in Starting to Discuss Rate Cut Preconditions in March

28 February 2024

By David Barwick – VILNIUS (Econostream) – It would not be inappropriate for the European Central Bank Governing Council at its meeting next week to start a discussion around monetary policy easing, even if March remains premature for a first rate cut, ECB Governing Council member Gediminas Šimkus said Monday.

In an interview with Econostream (transcript here), Šimkus, who heads the Bank of Lithuania, when asked if it was too early to initiate such a discussion, replied, ‘No, I don't think it's too soon.’

The euro area economy was stagnant last quarter and risks to growth were on the downside, he said. Headline and core inflation had declined, and there were indications that wage growth had now also slowed, he said.

‘So, the overall economic environment is not inconsistent with discussing rate cuts’, he said. ‘And the further we get into 2024, the probability of not just discussing rate cuts, but actually doing rate cuts, is getting quite high.’

As for actually cutting rates next week, ‘I'm definitely of the opinion that cutting in March would be premature’, he said. ‘But I don't see anything wrong about discussing what the preconditions could be and how we on the Governing Council envision the situation in which we would make a decision.’

April would bring more information, but ‘the information on wages will be incomplete’, and macroeconomic projections are not updated in April, he said. ‘It would take something unexpected to justify starting to cut in April.’

Still, ‘I can't exclude the possibility that we might cut in April’, he said. ‘But it's quite low but not zero. March is very low, for sure.’

‘As I see it, June is really the month to consider the rate cut’, he said. ‘Whether we cut depends on how the economy develops. For instance, I anticipate clearer signs of deceleration. I wouldn't be surprised if the economy is still stagnating and we see inflation falling further in our projections. This leads me to think that monetary policy is working with lags.’

A first cut of 25bp would ‘definitely’ be his preference, he said. ‘And I would even say that we don’t need to cut at every Governing Council monetary policy meeting. We can act more slowly. But those are tactics to be discussed later.’

Asked about the minimum reserve requirement, Šimkus said he saw ‘a monetary policy case in this particular situation for a higher minimum reserve requirement.’

‘I read the discussions about some bigger numbers, but in my eyes, 2% would be the level of the minimum reserve requirement that best fits the situation’, he added.

Remuneration should be set at zero, he said.