ECB Insight: Cipollone Follows in Predecessor’s Footsteps, Minimising Wage Concerns and Urging Faster Policy Loosening

27 March 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Piero Cipollone on Wednesday faithfully carried on the tradition of his predecessor with a speech intended above all to undermine the ECB’s unjustifiably timid approach to monetary easing.


Cipollone left no doubt in his first substantive remarks on monetary policy that, like Fabio Panetta, who resigned from the Board at the end of last October to assume leadership of the Banca d’Italia, he does not subscribe to prevailing wisdom at the ECB.


Medium-term wage moderation was a precondition for durably stable prices, he dutifully acknowledged. That effort at credibility was followed by an immediate ‘but’ and the suggestion that his less dovish colleagues suffered from an ‘excessive focus on short-term wage developments’ that insufficiently respected the dependence of the ‘fragile recovery’ on a recovery in wages.


Indeed, he implied further, their intransigence actually threatened productivity growth and employment.


That was the pattern of his speech from start to finish: whenever Cipollone cited dominant thinking at the ECB with respect to wage growth, he promptly qualified this:


  • ‘While concerns about unit labour costs need to be taken seriously, there are grounds to argue that the current economic environment allows for a recovery in real wages in the short term that will not fuel inflation, provided real wage increases gradually come into line with productivity growth.’
  • ‘While we must continue to carefully monitor the risks associated with wage growth that would exceed the projections, we also need to consider the symmetric risk associated with weaker than expected growth in wages. The failure of real wages to recover over the short term may have unintended effects.’


At one point, he conceded that awaiting more information constituted ‘additional insurance’. There was no need to wait long for the inevitable ‘but’ here, either. This time, Cipollone suggested that policymakers might not ‘remain proportionate’ by waiting for data while the economy languished.


‘If incoming data confirm the scenario foreseen in the March projections, we should stand ready to swiftly dial back our restrictive monetary policy stance’, he said.


Cipollone didn’t say what exactly ‘swiftly’ was supposed to mean, in particular whether he would advocate moving sooner than June, whether he envisioned moving in larger steps than the consensus of 25bp, or whether he would prefer moving at every meeting.


We feel safe in assuming that the answer is ‘yes’. This perception is reinforced by Cipollone’s citation of reassuring wage data received, as he observed, since the 7 March Governing Council meeting.


Of course, new data are always becoming available, and they all contribute to a fuller mosaic for authorities to base decisions on. However, the apparent reliance on what his peers would mostly consider interim information to be confirmed at a later date suggests in our view that for him and his faction, this is in fact the confirmation.


Like Panetta, Cipollone was not stingy with somewhat specious concerns about unduly eviscerating a perpetually feeble economy and so endangering price stability from the opposite direction of that worrying most observers.


‘If we hold [the policy rates] for too long, we might put the recovery at risk and delay the associated cyclical rebound in productivity growth’, he said. ‘This would be economically costly and induce risks for the sustained convergence of inflation to our target.’


Indeed, tight monetary policy’s demand-dampening effect, touted by most Governing Council members as an achievement whose contribution was indispensable for restoring price stability, was for Cipollone a veritable accusation.


‘The restrictive stance of our monetary policy has contributed to the stagnation of euro area real GDP in the last six quarters’, he said. ‘Given that monetary policy operates with a lag, it will continue to exert a negative impact on economic activity, with growth projected to remain anaemic in the first quarter of 2024.’


In the end, it is not like there was ever much doubt about which wing of the Governing Council Italy’s choice for the Executive Board would align with. Cipollone’s first major public monetary policy intervention since moving to Frankfurt should come as no surprise.