TRANSCRIPT: Interview with ECB Governing Council member Šimkus on 26 February 2024

28 February 2024

By David Barwick – VILNIUS (Econostream) - Following is the full transcript of the interview conducted by Econostream on 26 February with Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania and member of the Governing Council of the European Central Bank:

Q: Governor, what’s the date of the first rate cut?

A: Markets are so focussed on the date of the first rate cut, but monetary policy is working with a lag. And whether it’s April, June or July won't change a lot. What really matters is making the environment less restrictive. Sitting here on February 26, we don't know exactly what the data are going to be like in April or June. We will see that at the time of the decision, and then we will decide the day of the meeting that we can start cutting. But I look at this more holistically, and the first rate cut is not the main thing; where you land is more important.

Q: Is it too soon to at least talk about policy easing at the level of the Governing Council, so that you can converge more easily?

A: No, I don't think it's too soon. We had stagnating economic activity in the euro area in the last quarter of 2023. This year the risks to the economy are on the downside. Inflation, including the core measure, is decelerating. There are first signs that wages have also started to decelerate. Gas prices have fallen, and oil prices are at least not growing much despite all the geopolitical risks. Food prices are also decelerating. So, the overall economic environment is not inconsistent with discussing rate cuts. And the further we get into 2024, the probability of not just discussing rate cuts, but actually doing rate cuts, is getting quite high.

Q: The next Governing Council meeting is already in two weeks. Is that too soon just to have a discussion about the preconditions and so on?

A: No. I'm definitely of the opinion that cutting in March would be premature. 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.

Q: But June remains the date for that decision.

A: I prefer informed and mature decisions. In April, of course we will have some additional information compared to March. But the information on wages will be incomplete. Also, April falls between updated economic projections. It would take something unexpected to justify starting to cut in April.

Q: In any case, in general, observers can be sure that the ECB will clearly flag the cut ahead of time, right?

A: Here we get into probabilities. I can't exclude the possibility that we might cut in April. But it's quite low but not zero. March is very low, for sure.

Q: And June is high then?

A: I can express my opinion, but there are 26 of us on the Governing Council, and the decision is a joint one. As I see it, June is really the month to consider the rate cut. 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.

Q: And that first cut would ideally be 25bp?

A: That would be my preference. We are not in a rush, so we should take cautious steps and assess the impact and see how the economy evolves. So, 25bp is definitely my priority. 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.

Q: Can the ECB define precise preconditions and state what numbers we need to see for the cut?

A: That would be too deterministic, too mechanical. It's not about precise numbers, it's about how you assess the overall economic environment. Everything is interconnected. It’s not as if wage growth were enough by itself to make a decision. In June, wage growth will still be far beyond 3%, which is sometimes considered the level consistent with our inflation target of 2%.

Q: Those wanting to cut now make arguments like we shouldn't choke off the economy, the trend of inflation is clear and the September rate hike wasn't necessary, so it doesn't cost much to undo it. Do you find any of these valid?

A: We are confronted with a very interesting situation. We have such weak economic activity in some countries, and we still have very strong labour markets: unemployment is still continuing to fall, while wages are growing at rates above the long-term average. At some point, you need to realise that monetary policy is exerting an impact on the economy and inflation. Normally, you would expect monetary policy to impact the economy first, then the labour market, and after that, prices. The fact that this hasn’t been happening quite the way it usually does makes the present situation somewhat unique. On the other hand, if you worry too much about driving wage growth down to levels closer to 3%, you might wind up having too strong of an impact on the economy.

Q: When you say that we need to see that things are moving in the right direction, just looking at the past month or so, would you say on balance that the data have confirmed that we're going in the right direction?

A: Yes. There are signs of wage deceleration. The composite PMI increased slightly in January, but still below 50. The euro area economy did not fall into technical recession at the end of last year. We’ll see how the first quarter is, but data from the manufacturing sector in Germany are not very hopeful. So, the situation is rather mixed. You cannot conclude from the last month’s data that the economic outlook is getting brighter. But things can change quite quickly in various directions. We have the economy stagnating while the labour market remains robust. Headline inflation is falling because of lower energy and food prices and easing supply bottlenecks, but at the same time, core inflation is resisting a bit. So, I’m not inclined to jump to strong conclusions from the data in the last few weeks. I prefer to take a more holistic view – are we going in the right direction and are we firmly on track? If so, we have room to act, but not so much that we risk getting off track.

Q: And the question of the minimum reserves and the remuneration, where are we headed with that?

A: I think there's 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.

Q: And the remuneration?

A: No remuneration. Zero.