ECB Insight: Cipollone Comments Suggest ECB Readying for New Policy Environment

7 February 2025

By David Barwick – FRANKFURT (Econostream) – The interview published on Thursday with European Central Bank Executive Board Piero Cipollone suggests that there is a dawning realisation on Frankfurt’s East Side that ECB monetary policy may find itself confronting a new reality sooner than some expected.

In the interview with Reuters, Cipollone is invited at the outset to echo the sentiment expressed by ECB President Christine Lagarde as recently as 30 January that ‘the direction of travel for monetary policy is clear’.

One can of course argue about what exactly this means. A central bank is going to prefer a bit of ambiguity to a high degree of precision, but many observers would agree that to insist that ‘the direction is clear’ implies a clarity of vision extending beyond just the very next Governing Council meeting.

When what is likely to happen after the 6 March rate decision becomes subject to high doubt, maintaining that ‘the direction is clear’ becomes misleading, indeed irresponsible, and we expect monetary authorities to become more and more reluctant to employ the mantra or to make it more clearly conditional.

Such reluctance won’t necessarily manifest in equal measure across the hawk-dove spectrum; it comes as no surprise that Banque de France Governor François Villeroy de Galhau, at the forefront of those insisting on looser policy, had no qualms about repeating the expression on 31 January without even being explicitly asked to do so.

Though no less dovish than Villeroy, Cipollone was noticeably slower to embrace the opportunity to assure markets that there is no doubt that interest rates are still headed downward, instead first reaffirming that ‘[t]he direction of inflation is clear’ and that the ECB would, as its projections have indicated for some time, hit its price stability target this year.

The problem with leaving it there is that it is precisely the fact that the ECB is rapidly closing in on its target that introduces an element of uncertainty at odds with a high level of confidence about the direction of policy beyond the very short term.

Once the ECB is reasonably satisfied with the outlook for inflation, the order of the day becomes fine-tuning rather than robotically doing the same thing every six weeks anew when previous measures haven’t even fed through yet.

The direction is, by definition, no longer clear when the ECB is fine-tuning policy.

An Executive Board member is not only going to be particularly well aware of this but is also going to heed his or her words more carefully than, say, Villeroy.

Cipollone thus understandably limited his affirmation of the ‘direction is clear’ guidance to the tautology that, since the models incorporate market rate expectations, ‘this convergence with the inflation target is coherent with a declining interest rate path.’

As if that weren’t a sufficiently weak endorsement, he then noted that ‘[e]verything is of course contingent on the information at the time of the forecasts’, which to our mind underscores the crucial nature of the next set of projections in determining where things stand and where they are going.

Cipollone’s half-heartedness was not lost on his interviewers, who duly pressed him to clarify whether he had intended to express comfort with the rate expectations embedded in the December projections.

Cipollone though was having none of it, observing that the rate expectations of the December projections were based on the information available then.

True, Cipollone subsequently indicated that he saw the data since December as more or less consistent with the ECB’s baseline, though he only ruled out ‘huge changes’ in the ECB’s view of things, and these not even completely, trade tensions being an exception.

‘The overall understanding of where we are going is there, the fundamentals haven’t changed, so I do not expect a big change in direction’, he said.

Excluding any relevant change would sound different, but Cipollone being Cipollone, perhaps his dovish instincts coloured a response that, from another Board member, would have more unambiguously admitted the possibility of change.

In any event, it is clear that this was not quite the same Cipollone who less than a month previously spoke to Italian daily Corriere della Sera.

In that interview, published on 9 January, he was asked what ECB monetary policy should do, to which he unhesitatingly replied that ‘it shouldn’t try to guard excessively against possible future inflation shocks’, but rather ‘should seek to help the economy reach its potential’.

Not that he doesn’t still want to ‘have the economy growing close to potential’, as he said in the latest interview. But it was almost an afterthought, and on par with ‘reducing uncertainty as much as possible.’

Tellingly, Cipollone regards simply endorsing a March cut as tantamount to going out on a limb. ‘I don’t want to seem elusive, but the uncertainty is so high that anything can happen’, he said about that.

Needless to say, one cannot really call the direction of travel clear and simultaneously assert that ‘anything can happen’ in just four weeks. Indeed, one might ask why Lagarde deemed it proper last week to call the direction clear, albeit indirectly (‘We know the direction of travel’, she said. ‘You mentioned it in your question. And this is the direction that we will take.’)

Still, Lagarde qualified her comments by making clear that everything was conditional on incoming information. Similarly, while ECB Vice President Luis de Guindos today said the direction was ‘pretty clear’, he noted in the same breath that deviations from target would prompt a policy response.

As for Cipollone, everyone agreed that there remained ‘room for adjusting rates downwards’, he continued. ‘But we need to be extremely careful.’

The ECB still adhered to a meeting-by-meeting, data-dependent approach to monetary policy, he reminded. ‘I want to enter the meeting with an open mind, see the staff assessment and process incoming data’, he said.

While Cipollone’s refusal to venture a guess as to the outcome of the 6 March rate decision could lay claim to being the key part of the entire interview, another strong contender would be the following: ‘The uncertainty is exceptionally high, everything is in motion’, he said. ‘And we can’t assess where it’s all going until things fall in place.’

To reiterate what we wrote already on Wednesday in a reaction to comments made by de Guindos, we are increasingly reluctant to predict anything beyond 6 March, though we still see a cut on that day. Markets, we repeat, should not assume too much else.