TRANSCRIPT: Interview with ECB Governing Council member Müller on 19 April 2024

25 April 2024

By David Barwick – WASHINGTON (Econostream) - Following is the full transcript of the interview conducted by Econostream on 19 April with Madis Müller, Governor of the Estonian central bank and member of the Governing Council of the European Central Bank:

Q: Governor, you said recently that June could be the right time to start cutting rates. Having waited so long, wouldn’t it make sense to start with a cut of 50bp?

A: First of all, I don't think we’ve waited too long. We need to have the confidence that inflation is on a sufficiently clear downward path toward our target. So, it is reasonable to wait with this first decision. But now I believe it's the right time to start lowering interest rates, assuming that nothing unexpected happens before now and our June meeting. However, I think it's still important to be careful in our steps. 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.

Q: So, your assumption is that future steps will also be moderate and careful.

A: That would be my starting assumption at least. 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.

Q: The June meeting is not for another seven weeks, while the April meeting was just a week ago. Nothing's really changed, so what you're saying is that you could have just as easily cut in April.

A: We’re comparing actual developments to the latest projections and expectations in March of how the economy would develop. Some of the assumptions behind the projections concern interest rates, and you don't want to deviate too much from those assumptions. This would have happened if we had decided to lower interest rates much sooner than assumed in the projection exercise. To me, at least, that was one reason to wait a bit longer, in addition of course to the need for an additional degree of comfort when it comes to certain indicators regarding inflation, wages, and so on. So certainly, we'll have more data in June. When we say that we expect to be able to lower rates at the June meeting - and that's what I expect - it assumes that nothing dramatic happens until then, and that's the base case for now.

Q: Given the experience of the Americans with inflation persistence, have your peers here been telling you to be careful?

A: Indeed, the message also from the IMF here at the Spring Meetings is that in terms of monetary policy, 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. When it comes to US monetary policy, we should acknowledge that the situation here is still quite different in terms of the strength of the domestic economy, demand, consumption, and so on. Also, the stimulus provided by government spending is much more forceful here. So, the situation is different enough and it explains why inflation in the US is more persistent. And whatever policy from the Federal Reserve that might justify, we have to follow developments in the euro area and take our decisions based on what we see in Europe.

Q: At the same time, the euro area is more exposed to what happens geopolitically to oil prices, no?

A: Of course, we are exposed, and this is something we should also keep in mind when thinking of the risk factors we face. In the coming quarters, geopolitics may have an impact on economic outcomes in the euro area. And if so, then, of course, we will take that into account.

Q: Your colleagues have expressed various views on the subject of whether or not the ECB should take steps only at meetings at which the projections are updated. Do you have any view on the necessity of updated projections for the ECB to be able to act?

A: It’s easier to have thorough discussions about the outlook when you have fresh projections to base your discussion on. At the same time, we do get new data for meetings when there are no new projections. It's not as much, but I wouldn’t assume that we can make decisions only when we have new projections. Nevertheless, I have to say that one can make a case that it is easier to take decisions with greater confidence when you also have a fresh round of projections. 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.

Q: And that’s your preference then, as of today.

A: As of today, it's just too early to say much. As a matter of principle, it always helps to have new projections. But we really have to decide based on the data that are available as we go along. You could at some moment have enough data to justify making a decision at an interim meeting.

Q: It sounds like July could be an exception anyway, as some people are saying that when the ECB starts easing, it should do so with back-to-back cuts: 25 in June and then 25 in July.

A: I don't know if that should necessarily be so. I think it’s too early to say.

Q: Do you mean to express actual scepticism about the idea of moving so quickly?

A: I'm just saying I don’t have enough confidence yet to say that this could be justified.

Q: So, you're open-minded?

A: I'm open-minded about everything, but I wouldn’t be comfortable saying that we should start with back-to-back cuts. Based on what I know now, I think it's reasonable to expect us to start lowering rates at the June meeting. Regarding whatever happens beyond that, I think we should be open-minded. However, I also believe that if economic developments during the year end up close to what we currently expect, as is also reflected in the latest projections, then it's reasonable to expect a few additional interest rate cuts by the end of the year. But exactly when and how many, it's just too early to say.

Q: In any case, you're limited by the number of Council meetings.

A: That is true.

Q: June, July, September, October and December…

A: I think now you're already counting beyond ‘a few’.

Q: You seem to be pointing in the direction of at most 100bp of easing between now and the end of the year.

A: I don't want to be very specific at this point. It’s just too early.

Q: Still, do you have some level in mind, subject of course to developments, at which the ECB should should ultimately wind up if developments proceed as currently expected?

A: I think it's also too early to be specific about this.

Q: But clearly, you're not going to go as far down as you went up.

A: No, certainly not.

Q: Which in itself argues for a slower approach, right?

A: Perhaps.

Q: We're already close to the 2% target, and in 2026, we’ll be below it. You said earlier that we're not behind the curve, but doesn't it make you a little bit uneasy to see 1.9% for 2026?

A: I think that's really within the margin of error. To me, it's basically 2%.

Q: It could be the case that when the June projections are issued, the 2% moves even closer than it is now, as it did in March.

A: There are also upside risks for inflation coming from elevated oil prices, for example. There is still strong domestic demand and services inflation. We’re seeing signs of wage growth gradually slowing, but we want to see it go a bit further to have full confidence that the level of wage growth is consistent with our inflation target. So, a number of things still need to happen for us to get the confidence to proceed with rate cuts. And there are certainly risk factors that can lead to higher inflation, just as there is also the possibility that we'll end up lower than the latest projection. So, I don't want to speculate for the time being in either direction; we really just need to follow the actual developments.

Q: And if we finally get an economic pick-up, that will support inflation.

A: But that is already accounted for in the projections. To be fair, we are seeing early signs of activity picking up, but it's still early enough so that I would think that on the growth front, risks are probably a bit more to the downside in the near term, as this recovery has been delayed, compared to what we were expecting.

Q: And with respect to inflation, risks on balance are probably a bit to the upside, no?

A: Yes. On 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.

Q: There are not too many geopolitical risks likely to lead to lower oil prices, after all.

A: Exactly.

Q: So, what if it's September, time for another ECB rate cut, the second or the third, and the Fed still hasn’t gone yet? I understand that the ECB is not dependent on the Fed, but it's hard to believe that the ECB would go again in September if the Fed still hasn't cut.

A: To me, it's quite clear that we have to take our decisions based on what we see happening in the euro area. What is happening in the US or other major countries or regions has to be taken into account to the extent that it has an impact on developments in Europe through trade or the exchange rate. But having taken that into account, we will take our decisions based on the euro area outlook, independently of what the Federal Reserve, for example, may or may not decide.

Q: Even if it puts the ECB in an isolated position vis-à-vis the other major central banks in the sense of diverging from them in your policy path?

A: We have to take our decisions based on the economic situation and outlook in the euro area, incorporating everything we know in terms of the impact on the economy from other countries and regions, but, at the end, still taking our own decisions.

Q: What would need to happen between now and June for you to change your mind about the advisability of cutting rates? What are the most likely scenarios that would cause you to reconsider?

A: Since I've expressed confidence that we’re in a position to start lowering rates in June, I don't think any of the scenarios are very likely. But you could imagine a turnaround in wage dynamics, something dramatic happening. We're not that confident anymore about wage growth cooling down or some inflation metrics. So, I guess it's theoretically possible, but I don't consider it very likely.

Q:  How concerned are you about workers gaining even more bargaining power?

A: We're seeing some signs that wage pressures are softening, and that one can expect wage growth to gradually come down from the level where it is now, still close to 5%.

Q: At what point do you think the Governing Council should start discussing internally where it sees the endpoint of policy easing?

A: I'm not sure there is a static endpoint at all. We always have to keep in mind how we see inflation dynamics and take monetary policy decisions, given what we expect to happen in the economy. And on that basis we are always aiming to achieve the price stability objective. So, I don't believe there is necessarily a static endpoint.

Q: So, it’s a bit like when the ECB was hiking rates and we only knew we’d reached the peak in the rearview mirror.

A: I think that’s the right way to look at it.

Q: Do you have a view as to where the dividing line is between restrictive and non-restrictive monetary policy?

A: That is difficult to pinpoint. It's quite clear that we are restrictive now.

Q: And that you will still be restrictive after June.

A: Even if we do lower rates in June, it's clear that we will still be restrictive. That's something we need to keep in mind, and that's why it's reasonable to expect that if we're getting closer to the target and the inflation trend is confirmed, then of course, we need to be increasingly less restrictive. Speaking of the trend, I think we also should be ready for inflation not necessarily to decline in a linear fashion from the current level to exactly 2%. But rather, because of some base effects from 2023, one should expect some bumpiness down the road and not be surprised or alarmed if, in a particular month, the annual inflation reading goes up again.

Q: Indeed, one of your colleagues here, Mário Centeno, has been very critical of the notion that bumpiness in inflation should be of concern.

A: If you can explain it by factors that happened a year ago and the base effects from this, and if, when you look at month-to-month developments, you still feel comfortable that the trend is pointing in the right direction, then I think you shouldn't be too alarmed.

Q: How concerned should we be about fiscal policy, looking, for example, at France?

A: I think it is a concern in general. I'm very close to these debates in my own country, Estonia, where the government is struggling after having increased public sector wages, different social support measures and, understandably, defence expenditure, like many other countries. Meanwhile, taxes have not been increased proportionately. It seems increasingly difficult to get government finances onto a more sustainable path. There are signs of the same thing happening in other European countries. So of course, it is a concern. It's a problem also for governments as they face a higher interest burden. And the constant stimulus of persistent deficits may ultimately have to be taken into account when making monetary policy decisions. So, it is a problem on many fronts when public finances are not in order.

Q: Won’t the fact that the ECB is on the verge of easing policy in effect encourage governments to keep spending?

A: I hope not. We need to rebuild our fiscal buffers, as we still have substantial deficits in the euro area and debt levels have increased substantially during the past years. Interest rates for governments are still considerably higher than they were a few years ago. During the decade of very low rates, governments were able to issue and refinance debt on very favourable terms. Now, as this cheap debt needs to be refinanced at higher rates, there is a need for higher primary surpluses. That by itself is putting some pressure on governments, in addition to the level of debt already being as high as it is in many countries. That should force governments to pay attention to their debt trajectory and to make sure that it remains sustainable.

Q: Is this another argument for the ECB to proceed slowly?

A: Perhaps. In the end, of course we need to take into account the impact of fiscal policy, to the extent that it can have an influence on inflation. But at the same time, monetary policy should not be driven to any extent by the fiscal policy decisions of governments. That's very important to keep in mind. We retain our independence as monetary policymakers.

Q: There's growing discussion about whether or not the euro might decline all the way to parity with the dollar. Even without an exchange rate target, doesn’t this have to be considered another reason for the ECB to proceed slowly?

A: I don't have any particular views in terms of where the exchange rate could go. But speaking about the ways that developments in the US may have an impact on the euro area, the exchange rate is one obvious channel among several. Of course, we don't have any target in mind when it comes to the exchange rate. No matter what it is, we just have to take into account the impact of that on trade and investments and inflation at the end, and take our decisions based on that.

Q: Could substantial additional weakening call for you into question the wisdom of cutting rates in June?

A: The impact of the exchange rate on inflation is not that immediate, and I don't think we should take decisions based on near-term movements in the exchange rate, or in such a sort of direct or linear fashion as the question suggests. I think it's important to consider the impact that is likely from the more persistent changes in the exchange rate on the economy and inflation.

Q: Isabel Schnabel the other day suggested that perhaps the ECB could benefit from introducing a dot plot like the Fed. Could you envision that?

A: I agree that it might be problematic if we were too fixated on a particular base case of the projections, and then only kept that in mind when taking policy decisions. So certainly, you at least have to have in mind alternative scenarios for proper discussion of the most likely scenario reflected in the staff projections. When it comes to the dot plot, I think what is valuable in the way that ECB decision-making has been set up is that we don’t take public votes and in fact we don't take that many votes at all. So, who exactly said what or took which position at a meeting doesn’t get publicised, which makes it easier for Council members to take a European perspective in our deliberations and decisions. And this is something I think it's important to preserve. So, it’s a risk one would need to keep in mind when considering the dot plot, which would lead to speculation about who exactly is behind what dot at any point in time. But there hasn’t been a lot of discussion about that yet. I realise Isabel has made a suggestion and we can of course discuss it.

Q: And as a final question, is the topic of the last mile and the idea that it's subject to particular difficulties, as we're seeing in the US, still an active discussion for you?

A: Well, it seems to be the case in the US. So far in the euro area, the slowdown in inflation has, I would say, taken place quite nicely along expectations and projections, at least recently. I think we've yet to see if the last mile or kilometre ends up being more difficult or not.