ECB’s Cipollone: Our Rate Cuts Should Compensate for Tightening Due to QT

18 February 2025

By Marta Vilar – MADRID (Econostream) – European Central Bank Executive Board member Piero Cipollone said on Tuesday that the ECB should make sure that its interest rate decisions compensate for the tightening effect produced by shrinking the central bank balance sheet.

In a speech at an MNI Connect webcast, Cipollone said that the ECB should ‘ensure that our rate decisions adequately compensate for the tightening induced by the reduction of our balance sheet.’

As the ECB gradually cut interest rates towards the neutral level, it should be aware that two of its tools are creating opposite effects, he said.

‘We therefore need to ensure that we factor in the tightening of our balance sheet when calibrating our rate cuts to achieve our inflation aim’, he said.

The accommodation of rate cuts was mitigated by effects of quantitative tightening, he said.

‘A rate cut has a more contained easing effect when the balance sheet is simultaneously reduced’, he said. ‘This has implications when discussing the appropriate policy rate path.’

Most gauges on underlying inflation saw it settling around the 2% target in the medium term, he said.

Domestic inflation was still high because salaries and prices were adjusting to past inflation with a considerable lag, he indicated. However, he argued that the ECB was expecting a significant slowdown in wage growth.

‘[T]he Governing Council has gradually been reducing the degree of monetary policy restriction by cutting policy rates towards neutral territory’, he said. ‘While our direction is clear, we are very attentive to incoming information in view of the prevailing uncertainty about the economic environment.’

The ECB would stick to its meeting-by-meeting data-dependent approach, he said, as it allowed the institution to adapt the rate path if necessary to make sure inflation returns to 2%.