ECB Insight: Language May Reflect Shifting Circumstances, But ECB Won’t Want to Sound Hawkish

4 March 2025

By David Barwick – FRANKFURT (Econostream) – That the European Central Bank’s Governing Council will cut by 25bp on Thursday is virtually certain; we suppose the cut will be backed unanimously, but if not, then Austrian National Bank Governor Robert Holzmann should be the whole ‘opposition’.

We envision no counterproposal for March - i.e. a pause - being seriously discussed.

ECB President Christine Lagarde will uphold the data-driven, meeting-by-meeting approach. Amid high uncertainty, she is unlikely to explicitly encourage expectations of an April move or pause, dismissing precommitment and leaving all options on the table.

Less clear is whether she will encourage anything implicitly, in particular by retaining or changing key language. This refers especially to the characterisation of rates as restrictive.

According to the 30 January meeting account, ‘[i]t was widely felt that even with the current deposit facility rate, it was relatively safe to make the assessment that monetary policy was still restrictive.’

That feeling preceded the decision to cut rates, so reflected a DFR of 3%. Policymakers clinging to this language on 6 March would have to see themselves as ‘relatively safe’ in the context of the DFR at 2.75%.

To be sure, most Council members would not consider interest rates already downright unrestrictive even at 2.75%, especially since economic weakness – which, according to the account, reinforced policymakers’ comfort six weeks ago with continuing to call rates restrictive - has persisted.

Still, many would be ready to admit that the ECB is on the verge of entering neutral territory, and most would agree immediately that precise identification of the threshold is impossible.

It may thus be - and this is our view - that the time has come for messaging to be adjusted. High uncertainty around this prediction also reflects the unique importance of one individual in such decisions: Chief Economist Philip Lane.

Lane has not expressed himself on the subject, and would only echo what he said before December’s change to the language about keeping rates sufficiently restrictive, namely that come change must, but that there is no set timing.

The ECB is not yet in a situation of needing quid pro quos to engineer consensus. Our view that a change in language is nonetheless appropriate assumes that policymakers will realise that delaying such change amounts to a needless gamble that April won’t turn out to be on the late side.

Moreover, a change would correspond well to the ECB’s insistence that neutral territory is highly uncertain (besides potentially facilitating an April pause, if it comes to it, and a subsequent shift to a quarterly pace of cutting).

The ECB has no shortage of options. It will however want to keep in mind that while one choice could be simply glossing over whether or not rates are restrictive in the statement, this would just make the effort to pin Lagarde down the focus of the subsequent press conference.

Better would be for the ECB to recognise the need to continually reevaluate anew the degree of restrictiveness in the context of many months of ongoing policy easing, to opt for language like ‘interest rates are still restrictive, but less so’, and/or to concede that, as the last meeting account noted, ‘the point was approaching where monetary policy might no longer be characterised as restrictive.’

Still, it is a hard call.

Even more difficult to call is whether Lagarde will continue to describe the direction of travel as clear. A growing number of GC members find this no longer to be the case. That won’t be less true on 6 March, when Lagarde will stand before media after having cut interest rates once again.

We see merit in abandoning or at least qualifying this expression (saying perhaps merely ‘we don’t think we’re done’). The ECB may however not be ready for such a step, especially if it decides to soften the language related to restrictiveness, since doing both might be seen as too much.

That said, any modification of either the ‘direction’ language or that around restrictiveness will surely be carefully managed to limit unintended hawkish market reactions. A change is not going to be an attempt to signal that markets can’t necessarily still count on a couple more rate cuts this year.

It is as Bank of Lithuania Governor Gediminas Šimkus told Econostream in an interview last month: ‘I wouldn’t focus too much on whether the statement says monetary policy is still restrictive or not. Whether we keep this description or not does not by itself change the actions we take.’

All the same, the ECB may feel it can’t have its cake and eat it too, and refrain from toying with the language out of fear that the chances are too high of being misunderstood in the sense of being perceived as scaling back its likely actions.

More broadly, although the easing cycle has not run out of steam, the ECB is clearly in the midst of transitioning into – or being overtaken by - a new policy phase characterised by publicly expressed doubts about the need for further easing; the heightened potential for a pause; and demands to discuss all this.

We won’t call it the start of fine-tuning, also because we see little desire at the ECB for a sustained period during which rates are constantly subject with significant probability to being adjusted in any direction on an ad hoc basis to get them just right – which is how we understand ‘fine-tuning’.

Rather, we assume a preference for a certain clarity about where key rates should be left standing, ideally with no loose ends, just as when the ECB hiked to a level that became a plateau.

At any rate, each step after Thursday’s cut will be subject to growing scrutiny and debate, and the hesitancy of individual policymakers will grow more pronounced. Their public comments already make April the first (possible) cut subject to some doubt.

Still, specific scepticism about taking rates much lower is one thing, and sincere uncertainty about the ideal pace is another. The two should not be conflated.

We take as certain that the ECB will cut at least in April or June. It could well cut in both April AND June, though underlying uncertainty post-March about when to continue easing would be flanked by a ready-made wait-and-see argument specific to April, namely the lack of new forecasts.

So, while we are hardly ready to talk up the possibility of an April pause, given the simple fact that most Council members absolutely don’t see a DFR of 2.5% (to be reached on Thursday) as the terminal rate, neither does an April cut seem a given.

It may be that the question is settled only two days before the 17 April meeting with the publication of the ECB’s bank lending survey, which could provide significant upwind to the sentiment that the policy stance is no longer restrictive.

For now, some indication of how the ECB is apt to think could be gleaned from the updated projections, though these may not make obvious what outcome the April meeting should bring.

Policymakers have made reasonably clear that while they see things as proceeding largely in line with the story told in December, growth has been weak enough to revise down the near-term outlook somewhat. Risks to activity will undoubtedly be assessed as on the downside.

Inflation prospects seem less clear-cut, but a slight near-term correction upwards could be in the offing, even if disinflation will be seen as remaining on track overall, supported in particular by lower wage growth in the latter part of the year. Lagarde will again cite multiple risks variously pointing upwards and downwards.

All in all, observers may be left having to sift through the chatter that will inevitably follow this week’s Governing Council meeting – the ECB Watchers conference on 12 March being a potentially key occasion - for a better indication of what will happen in another six weeks.