Exclusive: ECB’s Demarco: Not Sure It’s Right Time to Pause, Since Data Still Show Us Moving in Right Direction

19 March 2025

By David Barwick and Marta Vilar – VALLETTA (Econostream) – While elevated uncertainty implies that a pause in monetary policy easing cannot currently be excluded in April, there may be reason for the European Central Bank to stick to the ‘default’ option of another rate cut, according to ECB Governing Council alternate member Alexander Demarco.

In an interview with Econostream (transcript here) on Tuesday, Demarco, who as acting governor of the Central Bank of Malta is ‘fully included in the ECB decision-making process’, in ECB President Christine Lagarde’s words, said that the latest projection indicated that disinflation was approximately on track, even with the slight recent deferral of the time by which the 2% target would be reached.

The pushing out of that date to late this year or early next year was ‘driven entirely by energy prices and the exchange rate, and since then, we've seen important changes in these components, both in the direction of lower price pressures’, Demarco pointed out.

‘So, for now, we are guided by the projections we have, but if energy prices and the exchange rate remain as they are today, the projections will probably show 2% achieved even earlier’, he said. ‘So, I’m not sure it’s the right time to pause, because the evidence still shows us moving in the right direction.’

At the same time, he said, there was a lot of ‘noise’ in the sense of developments on numerous fronts relevant to monetary policy, for which reason policymakers ‘need some more data between now and April to identify emerging tendencies in one direction or the other.’

Revisions to the staff inflation forecasts had tended to be small in recent projection exercises, confirming that the ECB was ‘really on track’ towards hitting its objective, he said. Therefore, if nothing were to change, cutting in April could be considered ‘the default’, he concurred.

‘But it's not the case that nothing can change’, he observed. ‘There is a lot of turbulence surrounding us, and this could have an impact on inflation, especially in the short term.’

Such turbulence could boost inflation expectations, a contingency that needed to be monitored, but another possibility was that it would hurt confidence, which would naturally serve to dampen growth, he said. The ECB’s outlook for growth had already been revised down repeatedly, and although authorities still predicted a recovery, activity in the region remained weak, he said.

‘And these negative events, including more trade barriers, are not likely to generate positive sentiment, to convince consumers to spend or to encourage investors to invest’, he said. ‘And that, to my mind, would signal downside risks for medium-term inflation.’

In the medium term, undershooting the inflation target was thus likelier than overshooting it, he said, especially if trade tensions worsened.

Prevailing uncertainty made it more important than ever for the ECB to retain its data-dependent, meeting-by-meeting approach to monetary policy, he urged. However, the absence of updated projections in April did not automatically make a pause at that Council meeting more probable, he said.

The ECB’s projections already incorporated a particular rate path, he noted. ‘[A]s long as the incoming data and conditions continue to signal that we remain on track, as was the case in the latest projection exercise, then we should continue to follow that interest rate path’, he argued.

The higher long-term bond yields in the euro area were not in and of themselves sufficient reason so far for the ECB to do anything, he said. The ramping up of defence spending was governments’ decision, and such a decision need not necessarily ‘represent a significant departure to the staff projections and the embedded interest rate path that would achieve the price stability objective’, he said.

‘If on the other hand fiscal positions become looser than the announced budgetary plans, this would need to be factored and reassessed accordingly’, he said. ‘Therefore, as usual, we will continue to monitor very closely fiscal developments and the evolution of inflation expectations.’

‘Hopefully, the revised fiscal governance rules will be respected by all Member States’, he added.