ECB Insight: De Guindos Comments Suggest Markets Shouldn’t Assume Too Much

5 February 2025

By David Barwick – FRANKFURT (Econostream) – Here are some aspects of the interview of European Central Bank Vice President Luis de Guindos’ with Slovakian business daily Hospodárske Noviny, published Wednesday, that we regard as particularly significant:

De Guindos warned against relying on the neutral rate as a proxy for the terminal rate. The only specific reason cited by him for this was the sometimes ‘very ample’ range of the neutral rate, depending on the model used, a somewhat curious argument, given the ECB is to share in-house research on Friday that is widely expected to define a specific, fairly narrow range for neutral. Also interesting is that although he said the ECB’s decisions are based on what one could simply call ‘everything’, he singled out the bank lending survey as ‘a much better indicator of the restrictiveness of our monetary policy’. The last BLS, released on 23 January, showed the investment environment in the euro area to be weak but also indicated that credit demand could be nearing an inflection point. As the ECB itself remarked in releasing the results, ‘For the first time since early 2022, banks expect a small net increase in demand for loans to firms and for housing loans in the first quarter of 2024.’ Were the next BLS, due on 15 April and thus two days before a rate decision, to paint a cautiously positive picture, this could be taken as evidence that the policy stance is no longer restrictive. While we don’t think de Guindos is predicting any particular outcome, given the high uncertainty, it underscores the point he may have been trying to make more subliminally: beyond March, markets shouldn’t assume too much.
De Guindos’ unwillingness to encourage open-ended easing expectations fit into this. He reiterated the absence of a predetermined rate path and the ECB’s reliance on incoming information, citing high uncertainty – not all that new, but a cautionary reminder. What stands out for us more is the sentence: ‘How much lower rates will go depends on the data confirming that inflation is converging towards our target in a sustainable manner.’ Although de Guindos promptly confirmed that the ECB remains confident of durably restoring price stability this year, he again invoked uncertainties. To this he added that ‘even if our current trajectory under the current circumstances is clear, nobody knows the level at which interest rates will end up.’ In other words, the ECB will cut until it – potentially abruptly - stops cutting. Admittedly, once the data confirm that price stability is achieved, perhaps it will still be seen as appropriate to implement a final ‘insurance cut’ to address lingering risks – but these of course can also point the other way. There seems little reason to expect much more beyond whenever price stability (in the medium term, as per the ECB's definition) is confirmed, and the fact that interest rates may not yet have been cut all the way down to the midpoint or low point of the neutral range is an objection de Guindos already took off the table. We are looking for him to be echoed by others in the coming weeks.
That the ECB won’t see its forthcoming assessment of where neutrality lies as a constraint follows from de Guindos’ remark that while such research is ‘crucial for the conceptual framework of the things we do’, high uncertainty ‘potentially calls for a more pragmatic approach, placing less weight on unobservable variables or model-based estimates with shortcomings and results expressed in wide ranges.’ This leaves us eagerly anticipating the ECB commentary that will accompany the research to be unveiled on Friday. We suspect it will seek to drive home the idea that the ECB’s work on where neutral lies should be understood as a theoretical exercise of limited practical applicability.

All in all, while we still have no problem considering a March cut as a given, we have grown marginally more sceptical of our own earlier view that an April cut can be assigned a strong likelihood and one in June a decent probability.