Exclusive: Transcript of Interview with ECB Governing Council member Scicluna on 18 March 2024

22 March 2024

By David Barwick - VALLETTA (Econostream) - Following is the full transcript of the interview conducted by Econostream on 18 March 2024 with Edward Scicluna, Governor of the Central Bank of Malta and member of the Governing Council of the European Central Bank:

Q: Governor, how did you feel about the March 7 decision, given you were already in favour of cutting rates?

A: The facts are the facts, but in this case, I think the decision was not so much about available numbers as about one’s personal stance, regarding the right timing of our first cut. Now what can you tell someone who says he’s not sufficiently confident? You can’t argue with that. Of course, there are risks that people can point to, such as wages. But in the end, a risk-averse stance prevailed, notwithstanding positive data and revised macro projections. And to be clear, it was not a meeting where one would have insisted, “I want to cut today.” What you would have is a kind of discussion, and in the course of that, people’s intentions become apparent without really much need to mention the phrase “rate cut”. So, it would be obvious what direction the current is heading. In short, there would be no objection to postponing action. There you are.

Q: In a way, it seems action was postponed twice, because not only did we not have a rate cut in March, but we’re probably not going to have a rate cut in April, either.

A: We have a data-driven, meeting-by-meeting approach, so I would be cautious about jumping to conclusions regarding future meetings. Everybody was aware that March would be important because we would have new macroeconomic projections. And since the outlook was in fact revised downwards, in that sense, March was the chance to act. If you don’t , then the onus is on you to give reasons for not acting. Now, April is different. We have some new data coming in, but no new projections. Let's say we go for a cut in April; then what reasons are you going to give? One can say that now we’re sufficiently convinced. So one cannot exclude April. It's not ideal in the sense of not being a result of data based on revised projections. One could even argue that it could appear like an admission that it could have been done in March. However, notwithstanding that one was not sufficiently convinced in March, still it could only take a little bit more time and some additional data to push to where April becomes a possibility. Even though everyone is talking about “June, June, June”, April does indeed become a possibility.

Q: So, does the apparent desire of so many members of the Governing Council to wait until June just reflect the absence of projections in April?

A: There was talk of June before the projections were updated in March, and at the time, expectations were that the projections would not be revised down. June is something we hinted at prior to the projections. So, it’s not a matter of going back on our word, because mention of June predated the newest projections. Now, the numbers have come out and we said, “Not yet.” Of course, individual governors can talk about June or the summer and all that. But April is not impossible or even improbable.

Q: How concerned are you that the ECB risks getting behind the curve?

A: I would not use that phrase “behind the curve” yet to describe where we are. Because it depends on how much we're choking the economy with our interest rates. The restrictiveness of our stance was for a reason. And now that the economy is helping with lower demand, we shouldn't over-burden activity any longer. Furthermore, regarding our revised inflation target, especially now with the symmetry of our monetary policy strategy, it no longer makes sense to speak of “killing the monster” of inflation. There's no such thing. It's a bit like Covid – there’s no point in denying that it's going to be with us, it’s here to stay, even if not at super-high levels. And nobody wants super-high inflation either, but we’re not going to “kill” it off entirely. So, I don’t agree with the terminology of “killing the monster” or “declaring victory”. One shouldn't use those words. And when somebody uses them in public discussion, it's just trying to show hawkishness. I would prefer to speak of good policy. Inflation is with us and of course as economists we know that some inflation is essential. That’s why when we had deflation, we were also scared. So, especially now with symmetry, we made it so clear that we need to allow 2% inflation. Maybe people in the streets don't fully understand that. But as economists we should understand that 2% inflation is not only safe, but actually healthy and desirable.

Q: Going back to the question of getting behind the curve, you said you wouldn’t use the phrase yet. If we don't cut rates in April, would you use it then? At what point would you?

A: There is new information before the April’s meeting: we have the labour cost index, HICP for February, flash HICP for March, the index of services production for January. And let's face it, all these are also part of the trend. So, you could justify why you want to move in April, because you have indications that the downward trend is continuing. So April and June are both evenly balanced. Depending on the size of the rate cuts one can avoid falling behind the curve.

Q: It sounds like in a pinch, you could live with waiting until June. But can you tell me about unanimity in the Governing Council?

A: I've experienced both the European Parliament and the Council of Ministers where, like at the ECB, you state your opinion freely. But in the former two institutions, ultimately, if you lose, I wouldn’t say you’re bitter, but you show your dissatisfaction and continue to speak about it. This is not the case at the ECB. At the ECB, we're more like a team, where people are open to being convinced by others and respect other people’s opinion. One senses the mood of the team as a whole and so you say, “Okay, today’s not the day. It’ll have to be another day.” You compromise, you help reach consensus. Like a team. So, when Christine talks about unanimity, she means it, because we give up some of the different opinions we started with. And we go along with the statement put out in the name of the whole Governing Council. At least, this is how it’s been during my three and a half years there. It's so unlike the EU Parliament. The Parliament always takes a formal vote, unlike the ECB, and if you are against something, then at any point and at every opportunity you make clear that you are still against it and that sort of thing. It's not that way at the ECB.

Q: Governor, you mentioned at one point the possibility of reacting with a rate hike larger than 25bp, but it seems that everybody is thinking in terms of 25bp steps.

A: This is a difficult issue: whether we’ll have a series of cuts, how much each would be in turn, whether there will be three this year, whether we ease by 100bp in total by the end of the year, and so on. But honestly, if I'm true to myself, and if we said that we'll stick to a meeting-by-meeting, data-driven approach, how much clarity can we provide ahead of time? You can try. But has uncertainty diminished? If so, that's fine. Because that was the only reason when we switched from giving forward guidance to being data-driven. That didn't mean that we were not data-driven before, of course; it's basically a euphemism for saying, “Look, we can’t go beyond one meeting at a time, because the uncertainty is so thick that we have to proceed meeting by meeting.” But on the other hand, if that uncertainty remains, and it does, then it would be pure speculation for me to talk about such details.

Q: We didn't mention wages yet. Do you see any reason there to be concerned?

A: I lived through the wage-price spiral of the 70s. I studied by candlelight because of the miners’ strike in the UK. I remember the aggressivity of the labour unions pre-Thatcher, and I know that wage-price spirals are very real and very difficult to stop. What we’re seeing now is completely different, and we’re seeing it in a very different environment. Even the inflation itself is different. Developments have been quite moderate, nothing we can’t live with, and I cannot see anything like a wage-price spiral. I’m not saying we don’t need to monitor developments, of course. We just don’t need to make a mountain out of a molehill.

Q: So, the desire to see the outcome of wage negotiations is not a reason to wait until June.

A: Personally, no.

Q: There has also been an argument that we need to wait for the US Federal Reserve before the ECB can move.

A: If we take a sober look at things, we have to admit that the US and Europe are different. Even growth is different. And in this case as well, we are different. Of course, there is a certain influence, but it goes between all the major central banks. And we all naturally watch each other. But I haven’t seen any evidence that we at the ECB are “Fed followers”.

Q: Once you do start cutting, does the series of cuts have to be smooth for you, or can you cut and then wait and see what happens?

A: You need to be really, really sure of yourself and what you're saying in order to announce three or any other number of cuts in succession. I think most of us will want to stick to the meeting-by-meeting, data-driven approach.