Exclusive: ECB’s Müller: ‘Wouldn’t Be Comfortable Saying That We Should Start With Back-To-Back Cuts’

25 April 2024

By David Barwick – WASHINGTON (Econostream) – Available information does not now suggest that the European Central Bank Governing Council should necessarily cut rates in both June and July, but rather, monetary authorities will need to be guided by data still to come, ECB Governing Council member Madis Müller said Friday.


In an interview (transcript here) with Econostream, Müller, who heads the Estonian central bank, reiterated his support for a June cut of 25bp, barring unexpected developments between now and then, while stressing the importance of proceeding in cautious steps and keeping a watchful eye on mainly upside risks to inflation.


‘[I]t's still important to be careful in our steps’, he said in rejecting a 50bp move in June. ‘Even with developments more or less in line with what we expected in the latest projections, for example, we still cannot claim complete victory over inflation. That's why it's reasonable to start with a 25bp cut in June, and thereafter to see how actual developments look in terms of inflation, growth and all the other key variables before taking our next decision based on these.’


I don't feel that we are falling behind the curve, so I think it's natural to move at a moderate pace with careful steps’, he added.


This approach implied hesitancy about committing to any timetable, he indicated. ‘I'm open-minded about everything, but I wouldn’t be comfortable saying that we should start with back-to-back cuts’, he said.


The IMF’s message during the Spring Meetings, attended by Müller, was also that ‘one should be careful not to move too fast and really make sure that the inflation dynamics are sustainable and that we get inflation down to where we want’, he observed.


With respect to inflation, ‘you could argue that risks are still to the upside, also from oil prices and geopolitics and how geopolitics might end up having an impact’, he said. The latter may affect euro area developments in the next quarters in such a way that monetary authorities would need to take them into account, he warned.


It was not yet evident whether the last mile of European disinflation would be particularly tough, he said, but no scenario getting in the way of a June cut was very likely.


‘But you could imagine a turnaround in wage dynamics, something dramatic happening’, he said. ‘We're not that confident anymore about wage growth cooling down or some inflation metrics.’


Still, he expressed the expectation that wage growth would gradually subside.


Müller declined to endorse the view that the ECB should in general only change monetary policy in conjunction with new macroeconomic forecasts, though he was clearly less inclined to act in the absence of an updated outlook.


‘Especially as we are starting with rate cuts while inflation is still above our target, we certainly don’t have to lower rates at every subsequent meeting’, he said.


Still, even if it was ‘easier to have thorough discussions about the outlook when you have fresh projections to base your discussion on’, he said, the ECB ‘could at some moment have enough data to justify making a decision at an interim meeting.’


Fiscal policy was of concern, he said, observing that it appeared ‘increasingly difficult to get government finances onto a more sustainable path.’


Not only was the burden of high interest rates an issue for governments, but ‘the constant stimulus of persistent deficits may ultimately have to be taken into account when making monetary policy decisions’, he cautioned.


With respect to the idea of introducing a US Federal Reserve-style dot plot in the euro area, Müller agreed that it was at least essential to ‘have in mind alternative scenarios for proper discussion of the most likely scenario reflected in the staff projections.’


An actual dot plot would however entail the risk of ‘speculation about who exactly is behind what dot at any point in time’, he noted.