They Said It - Recent Comments of ECB Governing Council Members
8 April 2024
By David Barwick – FRANKFURT (Econostream) – The following is an overview of recent comments made by European Central Bank Governing Council members. We include only comments made since the Governing Council meeting of 7 March, but earlier comments can still be seen in versions up to that of 4 March.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christine Lagarde (ECB)
20 March 2024
‘…there are reasons to believe that the expected disinflationary path will continue. First, for some time now inflation outturns have been broadly in line with our expectations. In 2023 we saw a reduction of about 70% in the average absolute error in our staff projections relative to 2022, one quarter ahead. Second, we now see inflation returning to 2% earlier in our projection horizon than before, in mid-2025, and not exceeding our target for the remainder of the horizon. Third, the composition of inflation is improving, as we now expect lower core inflation in the medium term. This suggests that the convergence to 2% is likely to be more durable and less beholden to assumptions about commodity prices, although the latter can always prove hazardous. The other criteria are also becoming more consistent with this improved inflation outlook. The transmission of our monetary policy is unfolding in the right direction. Financing conditions have reacted strongly to higher rates, loan demand has weakened and, in turn, activity has slowed notably in the most interest-sensitive sectors of the economy. And underlying inflation is generally easing. Nearly all the measures that we track are declining, and the range of readings between the different measures has narrowed from 4.1 percentage points at its peak to 2.4 percentage points today. Some of the measures of underlying inflation with the best leading indicator properties for future inflation have dropped steeply. But, at the same time, domestic price pressures remain strong. Services inflation is still stubborn and hovering around 4%, while momentum increased somewhat in February. And our indicator of domestic inflation, which measures items with a low import content, stands at 4.5%, at the top of the range of underlying inflation measures that we monitor. This measure has also been found to have good leading indicator properties. These pressures largely reflect robust wage growth as the catch-up process continues, as well as a tight labour market that has so far been resilient to a slowing economy. Employment grew by two million cumulatively during 2023, even as the economy stagnated, while firms continue to hoard labour. This pattern is mechanically lowering labour productivity and pushing up unit labour costs. At this stage, it is difficult to assess whether these price pressures simply reflect the lag in wages and services prices and the procyclical nature of productivity, or whether they signal persistent inflationary pressures. So, although we have made significant progress in all three of our framework criteria, we are not yet sufficiently confident that we are on a sustainable path towards our inflation target.’
‘So the essential question is: what do we need to see to become sufficiently confident to start dialling back our restrictive policy stance? Put simply, we need to move further along the disinflationary path. And there are three domestic factors that will be decisive to ensuring that the inflation path evolves as we project. The first of these is wage growth. Our forecast sees nominal wages slowing to 3% over the next three years, allowing real wages to fully catch up to pre-pandemic levels over the projection horizon, also including productivity gains. But with the unemployment rate expected to remain very low at 6.6%, this wage path cannot be taken for granted. Sensitivity analysis by ECB staff shows that if there were an earlier full catch-up by the end of this year, inflation would rise to 3% in 2025 and only fall to 2.5% in 2026. The second is profit margins. The compression of profit margins has allowed wages to catch up without further accelerating inflation. Unit profits accounted for more than 50% of the GDP deflator in the last quarter of 2022 but this figure fell to just 20% a year later. But our sensitivity analysis shows that, if firms were to regain pricing power as the economy recovers and profit margins were to rise by an accumulated 1 percentage point more than we project until the end of 2026, inflation would be 2.7% in 2025 and 2.4% in 2026. The third factor is productivity growth. We expect that a pick-up in demand, if accommodated by fully utilising hoarded labour, will lead to rising productivity growth and falling unit labour costs. We project labour productivity growth of 0.1% this year before it rises to 1.2% in 2025 and 2026. But the path of inflation could be different if, in a new geopolitical environment, productivity losses for European firms turn out to be partly structural. Given the delays with which these data become available, we cannot wait until we have all the relevant information. To do so could risk being too late in adjusting policy. But in the coming months, we expect to have two important pieces of evidence that could raise our confidence level sufficiently for a first policy move. First, we will have more data to confirm whether wages are indeed growing in a way that is compatible with inflation reaching our target sustainably by mid-2025. The latest data point in this direction. Growth in compensation per employee edged down to 4.6% in the fourth quarter of last year – slightly below our March projection – from 5.1% in the third quarter. Negotiated wage growth, which accounts for the lion’s share of compensation per employee growth, also decreased from 4.7% to 4.5% in the fourth quarter. Similarly, the ECB’s forward-looking wage tracker, which anticipates the development of negotiated wage growth in the euro area, is showing early signs that pressure is easing. Average wage growth in 2024 for all existing wage contracts fell from 4.4% at the time of our January Governing Council meeting to 4.2% at the time of our meeting in March. The coming months will help us form an even clearer picture. We will receive data on negotiated wage growth in the first quarter of this year at the end of May. And many wage negotiations are currently taking place in large sectors, the outcome of which will be entered into our wage tracker as soon as the negotiations are concluded. Employees whose contracts ran out last year and have not been renewed, or will run out by March 2024, account for around one-third of those in our wage tracker. Second, by June we will have a new set of projections that will confirm whether the inflation path we foresaw in our March forecast remains valid. These projections will also implicitly give us more insight into the path of underlying inflation. We will have more visibility on the strength of the recovery and the likely direction of the labour market, and therefore on the consequences for wages, profits and productivity. In addition, we will have had a longer window to assess whether inflation data continue to fall broadly in line with our projections. If they do, we can be more confident that our models are now better accurately capturing inflation dynamics. And this confirmation will be particularly important for the more persistent components, such as services, so that we can trust these components will continue to decline in keeping with their typical lagging pattern. If these data reveal a sufficient degree of alignment between the path of underlying inflation and our projections, and assuming transmission remains strong, we will be able to move into the dialling back phase of our policy cycle and make policy less restrictive. But thereafter, domestic price pressures will still be visible. We expect services inflation, for example, to remain elevated for most of this year. So, there will be a period ahead where we need to confirm on an ongoing basis that the incoming data supports our inflation outlook. This has two important implications for the policy path ahead. First, our decisions will have to remain data dependent and meeting-by-meeting, responding to new information as it comes in. This implies that, even after the first rate cut, we cannot pre-commit to a particular rate path. Second, our policy framework will remain important to process the incoming data and calibrate the appropriate policy stance. At the same time, the relative weights assigned to the three criteria will have to be regularly examined.’
‘On inflation, first of all, I would observe that we are on this disinflationary process, and we are making progress. We came from 2.9% in December, 2.8% in January, 2.6% in February. There is a definite decline which is under way, and we are making good progress towards our inflation target. And we are more confident as a result. But we are not sufficiently confident, and we clearly need more evidence, more data. We know that this data will come in the next few months. We will know a little more in April, but we will know a lot more in June. So, this is what we have determined during our discussion this morning. And as usual, we have proceeded with a review of the three criteria, which you know is the inflation outlook which, as you will have noted in the monetary policy statement, has been slightly revised, a bit more for 2024 for headline [inflation], but slightly, both for headline and core [inflation] in the next two years, 2025 and 2026. But we feel more confident about those projections. The second element that we look at, as you know, is the underlying inflation and on that front as well we are seeing a narrowing of the range between the various measures that we use. We are also seeing a general moderation, with one exception. I'll come back to that if you want. We have looked carefully at the strength of monetary policy transmission. Those are the three components that we are very keen to check carefully and to monitor meeting-by-meeting to see what information it delivers. And it’s clearly a positive signal, but certainly not enough of a series of signals to make us confident enough yet at this point in time.’
‘There was general broad agreement about the fact that we will get a lot more data and a lot more information in June. That's a certainty. There was also a very broad agreement around the fact that we will not change our views on one single data [point]. And what we are seeing in the data at the moment is indicating certain movements that are directionally good, but it is not strong enough and durable enough, for the moment, to give us sufficient confidence. So that was a generally accepted sentiment around the room and the decision that we made was a unanimous decision, by the way. You are correct that while we continue to look at the three components of the reaction function; the inflation outlook, the underlying inflation and the strength of monetary policy, there are two components that we are particularly vigilant about. And those two components are the wages evolution as well as the profits evolution. Unit labour costs, unit profits are two items that we will be particularly attentive to and will continue to be attentive to. I mentioned that in the underlying inflation measurements there is one which is not moving in the same direction as the others. The others are generally declining and the range between the various instruments is narrowing as well. But there is one that is not declining and that is domestic inflation. Domestic inflation is largely informed by services, which itself is for most services labour-intensive, and therefore very sensitive to wage evolution. So those are the two components that we will particularly zero in and try to be laser focused on to see whether there is confirmation or not of this beginning of moderation that we are seeing on the wage front, and confirmation of what has been observed on the profits, as to whether or not profits absorb and act as a buffer for the wage increases. We will have the Q4 numbers for CPE, for compensation per employee, tomorrow. Our assessment for the moment is: [the CPE was] declining, relative to the third quarter. I think it's a conservative assessment given the various other elements that we try to look at. We look at some backward-looking elements, but we also try to be as forward-looking as we can by really following very carefully all the new agreements that are signed and how terms and conditions will apply going forward.’
‘But we don't only look at core. We look at other measurements of underlying inflation to try to remove the noise from the signals and try to really measure each and every time what is going to be the best indicator to give us the measurements of what is to come. I wish everything was closer to our target. We're not there yet. We are not there. Even on headline inflation, we are still projecting 2.3%, which is a revision from what we had before. But we're still at 2.3% in 2024 and we are at 2% in 2025. Core inflation is at 2.6% in 2024 and then moving to 2.1% in 2025 and finally reaching 2% in 2026. I am not saying here that we will wait until we are at 2% and that we see 2% to take a decision. This is not what I'm saying here. But in terms of projections, both headline and core, this is what we are seeing.’
‘I've tried in the past to refrain from passing judgement and commenting specifically on market expectations. I just note that it seems to be converging better, but everyone has to do their job.’
‘But I would not commit to any kind of pace, rhythm, magnitude, because we will continue to be data dependent. We will continue to observe how the economy evolves, how the labour market moves, how wages moderate, and the impact of tightening on the financing of the economy. All these factors will be taken into account to determine future moves.’
‘So first of all, we have not discussed rate cuts at this meeting. What we have done is that we have just begun discussing the dialling back of our restrictive stance. But of course we need a lot more information coming in in the next few months to be sufficiently confident. Your second question related to the degree of information. Well, when you look at what will be published and what data we will have, in terms of activity, wages and profits, we will have a little in April, and we will have a lot more of that for our June meeting. It matters, because we are data dependent, and we are adamant that we will be data dependent.’
‘Once the data confirms that we are sufficiently confident to reach our 2% target in the medium term and make sure that it will be sustainable, we will act. That's what I can tell you. By the way, I didn’t say that there was no rush. I said that we did not discuss cuts for this meeting, but we are just beginning to discuss the dialling back of our restrictive stance, provided that we have enough and certainly more information to be sufficiently confident.’
Isabel Schnabel (ECB)
20 March 2024
‘In any case, these studies suggest that the recent rise in real long-term rates may be partly due to financial market participants interpreting the policy tightening, as well as recent central bank communication, as a shift in policymakers’ beliefs about the level of r*. In other words, the impact of monetary policy actions and communication may be stronger than conventionally assumed. This would also imply that central banks have little to learn about the natural rate of interest from looking at market pricing, as we may just be looking in the mirror.’
‘The changes to our operational framework do not have any implications for our monetary policy stance, neither for our interest rate policy nor for our monetary policy bond portfolios, which we expect to continue to be run off.’
Philip Lane (ECB)
25 March 2024
‘Inflation has come down a lot. This is, by the way, what we expected to happen last year, essentially, the very big price increases in 2022 especially were not repeated in 2023, and with this improvement in the situation, inflation has come down. We have to make a judgement call about whether at some point the improvement in inflation will allow us to roll back some of the rate increases you mentioned. And essentially where we are now in March is, we do have a baseline forecast, we look ahead, and the baseline forecast says this year inflation will average at 2.3%. So, since in February inflation was at 2.6[%], we do think there will be more progress this year, and then we think in the next year and the year after inflation should stabilise around our 2% target. I think this is a good baseline and essentially what we decided is in these weeks from that meeting, we need to keep on checking this assessment. And what I would say is if this assessment is confirmed, then we will start looking more closely at reversing some of the rate increases we’ve made. So, what I would say is, good progress.’
‘We expect to see bigger wage increases than normal, we had that last year, we expect to have it this year and also, by the way, next year in ’25, so it’s a multi-year process. … We had a peak last year of wage increases at 5.3[%], what we are looking for is evidence of deceleration to mid-fours this year. We’ve seen deceleration in the last months of ’23, we’ve seen deceleration in the opening weeks of ’24, but we need to see more evidence of that. … We’re confident that that [normalisation of wages] is on track, but of course it’s always good to double-check with the incoming data.’
‘In the end, I think it’s the main basis of this, we want our operational framework to deliver the commercial environment in the money market needed to bring the economy where we want it to go in terms of inflation. And we think this system, this operational framework will do that. It’s a system that relies less on a very large balance sheet, and so it’s suited to this new world in which we no longer need to do QE, we no longer need to have a very large targeted lending operation and so it’s really, I think, good practice to anticipate the fact that in the coming years -- let me emphasise, it’s not about next week or the rest of this year -- this is just helping the banking system prepare for the future.’
‘The world has changed in many ways and there are now pay increases, but much less than the peak inflation rate. So, in terms of what we’re thinking about that’s good, inflation has come down quite quickly, but we also have to recognise that the core inflation rate is coming down, but not super quickly, so this is why we still have some concerns.’
‘Goods inflation has come down quickly, so that is not a headache. … Services inflation is above the historical distribution, and this is why we have concerns.’
‘We still have relatively high wage increases this year compared to normal. … How can you have this really big increase in productivity this year? That’s the big economic discussion. And what we say is that there is going to be, not quite yet, but later this year, a good economic recovery. Consumption is going to go up quite a bit, both private and government consumption and therefore the economy is going to start to grow. In a year the average doesn’t look great, but within a year it is going to grow by 1.1%, which is a lot better than last year, which has 0.2. So, this recovery is essential to the forecasts. People get those pay increases, consumption goes up, and what we should see is as demand goes up for the economy, firms can increase output without increasing the margins, because employment is quite high, without increasing employment, and that would improve productivity.’
‘Compared to one year ago, there are indicators that the labour market is slowing down. … If you track the vacancies posted on Indeed, compared to where they were a year ago, they are a lot lower. So again, for wage dynamics, one of the classic issues is firms are scared, if they know there’s a lot of vacancies there, they’re scared their workers will walk out the door.’
‘In the end, we do have this concern about the wage intensive sectors still having relatively high inflation. Wages should be coming down, and again, what we need to see is ‘ok, is that happening in the data?’. So last year, wages were going up. … But in the last month of last year, wages started to slow down a bit, still growing, but less intensely. Are we seeing that the wage slowdown is strong enough? Because, as in the forecast, we need to see it come down into the four [percent]s and then into the threes next year. And so what we have now is what’s called a wage tracker, every wage negotiation in Europe, at least in the countries that are doing it, is fed into our data-base. We say, “Okay, how many workers this week got a pay increase?”, and then we do an update for the overall European picture. And what we are seeing now in February is that it is starting to come into the fours, so that is in line with the forecast, but we need to see more of this in the weeks ahead.’
‘The other part of what we need to see is how do you reconcile pay increases around 4.5[%] this year with inflation around 2.5[%]? What we expect to see is profits fall. And last year profits were very high at the start of last year and they have started to fall. … The functional role of monetary policy is to create a price environment which supports disinflation even when the costs are going up. And that’s essentially what we’re trying to balance, if we take our foot off the pedal by doing rate cuts, will that feed stronger price increases or is the wage deceleration further enough along that we will still hit the 2%? That’s essentially a big part of what we are looking at.’
‘There has been a lot of monetary policy action here to dampen demand. The market expects us at some point soon to start easing, because if we left the rates where they are now, we would go beyond, we would go back to a kind of disinflation. … Again, to repeat, if we left rates where they are, this would continue, and it would be beyond what we needed to bring inflation back to 2%.’
‘Core is coming down more slowly than historically… so we do have an issue about how to think about the dynamics of core inflation in the context of this rapid overall surge. And this is why is it is about services inflation, and we have to think about that.’
‘As energy prices recede and these bottlenecks improve you also get declining underlying inflation… There’s still some room to go. So when I say we do need to see core inflation go down more, part of this is the reverse in energy prices and the easing of bottlenecks is still playing a role, so the disinflation is not just about wage deceleration.’
‘There is a substantive issue now about services… There is a contribution from the energy easing, but we do have a fundamental issue here about wages and prices.’
‘The softening of the labour market is visible... We are seeing deceleration, but what we need to see is more.’
‘So you have still elevated wage increases… So to have an overall drop in the inflation that we project you also need to see a profit contraction.’
‘We will be calibrating for a long time to come the balance between the level of restrictiveness we need and the progress we see in outline inflation and wages. So again, it’s not a 0-1 debate, so directionally that’s where we’re operating, is influencing the price of firms and that’s truly restricting the demand and containing expectations, so let’s see.’
‘So what remains is the services inflation, in which again, the amount of decline is a lot weaker than the historical normal. And, again, I don’t think that’s so mysterious. That’s why you are hearing all of us saying there are remaining concerns about services inflation… Also these are more labour-intensive, so wage costs are maybe not so important for big manufacturing firms, but they’re important for many services.’
‘It is our assessment here that oil is going to decline in prices… So that is going to be a source of lower inflation. … Fundamentally, our new forecast is heavily influenced by lower energy prices. Let me emphasise we think energy prices matter for all of the items in the price index because energy is a big input cost to many sectors… So energy prices, when they have really big swings, show up everywhere, and they also show up in the wage data.’
‘Let me highlight that we think after two years of pretty subdued progress to the economy growing only 0.5[%] last year and only 0.6[%] this year, it’s going to be a sizable pick-up in the economy in the coming years, and this is a very important part of the forecast, it’s worth thinking about. How do you move from basically an economy that is barely growing to the economy that is growing, in the European context, quite quickly? And the ingredients are number one, wages now are growing more quickly than inflation, so the ability of households to consume is improving this year. So it’s going to be consumption-driven. With the activation of lower interest rates, investment is expected to recover, not quite yet, but in the next couple of years. ... But this is a forecast, it’s a conjecture, so there is uncertainty here about when we’re going to see this pick-up.’
‘What we have is kind of a mixed labour market. We think it’s cooling down, so again, compared to the start of last year vacancy rates, for example on Indeed, are coming down and firms are no longer as fearful about labour shortages. They were saying in ’22, first half of ’23, “It’s hard to find workers.”’ Now if they find it’s hard to find workers, they’re more likely to raise wages. But these numbers are coming down now, so we do think the labour market is softening in many ways.’
‘So there are pro-inflationary forces in the economy… and the big one is the wage dynamic.’
‘Inflation is affected by wage increases only if firms pass along the wage increase. So economically, under what conditions do firms rather than raise prices say, “We’re just going to accept lower profits.”’? So, the context here is that in 2022 firms made a lot of money, profit rates are heavily higher than normal. So, we think with restrictive monetary policy, firms are able to afford to absorb some of those rise wage increases into their profits. And that’s an important way we reconcile wages growing at 4[%] or 5% and inflation at 2[%]. It doesn’t seem to add up, and the way it adds up is we do think we have a phase now where profits will shrink and will decline in normal terms. Directionally, over the course of last year, the contribution of profits got smaller, and we do think there’s some room to go with that.’
‘It’s fair to say last week in our March meeting, that was, I think, an important milestone in evidence accumulation. In our March meeting last week we were able to look back and to see that the disinflation process has been ongoing, we continue to make progress, continue to move towards our 2% target. So absolutely a lot of evidence is accumulating. But what’s also fair to say is that the transition from this holding phase – we’ve been on hold since last September after a substantial hiking cycle – is we do have to, I think, take our time to get that right from moving from holding to dialing back restrictions. So, it’s clear that we have a lot of confidence, a little more data will help us to build sufficient confidence in the coming weeks.’
‘So the remain open question, and that’s why if we’re totally convinced, totally confident, the discussion would move a lot more quickly. So the remain open question, and I think what’s true is that at the start of the year, January, February, there are kind of turn of the year dimensions to the data and we need to see that settle down a bit. So again, I think that we’re very good at process to analyse the data to make projections. So, we have a fairly stable view that we are on our way back to 2%, but I think that we have the time to validate that to see some more confirmation, especially in those segments, it’s not so much over core inflation, I think, but in the services component, and we do have some time to see further validation. Because it’s important to get that initial transition away from holding towards dialing back restrictions, to get that right.’
‘We think in quarters from a macro point of view, so I wouldn’t analyse April versus June. I think that Q2 is a time when we will be far enough into 2024 to see more of the wage dynamic, to see more of the price pressures. So, we will learn some more by April, we will learn a lot more by June.’
‘Looking to the next phase of monetary policy, ensuring the convergence of inflation to the target on a sustainable basis will determine the future path of policy rates.’
Luis de Guindos (ECB)
19 March 2024
‘Looking at recent inflation developments, we can see a very clear disinflationary process. This is reflected in both headline and core inflation readings. The main risk is the combination of high wage growth, which is currently hovering around 5%, and very low productivity. These two factors together could lead to a significant increase in unit labour costs. And this is a risk, especially for services inflation, because services are labour intensive and shielded from foreign competition. In that sense, services inflation is stickier. And that’s why we need to wait. The evolution of wages is key and most of the wage bargaining agreements will have been concluded in the first months of this year. We will have more information in June.’
‘Rates affect financing conditions. That’s how monetary policy works. When rates go up, financing conditions tighten and loans become more expensive – and this works in the other direction, too. We haven’t yet discussed anything about future rate moves. We need to gather more information. In June we will also have our new projections and we will be ready to discuss this. We are not date-dependent – we are data-dependent. We will have to decide when to adjust our policy stance based on the data we see.’
‘We project that inflation in 12 to 18 months from now will be hovering around our 2% target, but we don’t see a risk of it falling below that. We need to see a steady, continuous convergence of inflation towards 2%.’
‘We are seeing that the slowdown in inflation is more intense than the moderation that is happening in nominal wage growth. This logically has a positive impact from the point of view of the purchasing power and the labour market, and we hope that there will be a boost in consumption along with the stabilization of the world economy, which will be the two drivers of economic recovery and of the increase in activity in the coming months.’
‘We try to be confident that this disinflation process continues, both for general inflation and for underlying inflation. All underlying inflation indicators are relatively low, and we hope to continue accumulating more and more confidence that inflation will converge to our price stability target, which is 2%.’
‘The main risk is the combination of salaries, that are growing at 5%, with very reduced productivity. What this means is that unit labour costs are growing very quickly and these unit labour costs impact one sector especially, that is the service sector.’
‘We are seeing that if these unit labour costs are not partially absorbed by the evolution of profits, then inflationary tension may occur.’
‘We decided to keep interest rates unchanged. Maintaining interest rates unchanged because we fundamentally want to accumulate information on the evolution of the factors mentioned before, the evolution of the labour market, the evolution of salaries, the evolution of productivity, etc. And we are convinced that by June we will have enough information. We will have a higher level of information, among other factors, because there are many collective agreements that are signed in the first months of each year, and obviously in June we will have the most complete image and in this case we will be able to make decisions regarding the modification of monetary policy.’
‘We will have much more confidence with respect to all the data that was mentioned before, that as of June, for example, we will have much more information and which evidently says it clearly, inflation is decelerating. We hope that it will continue to decelerate, but we need to be convinced that inflation converges stably towards the 2% objective and that is why what happens in the labour market is very important’.
‘We will have two Governing Council meetings, one in April and the other in June and I will repeat, I am convinced that in June we will have much more information. What is the reason for waiting until June? The reason for waiting until June is fundamentally the whole closure of the collective agreements that will be concentrated in a very clear way in the first months of the year.’
‘In monetary policy, the adjustment is fine. The difference between April and June, I would say with all due respect, is journalistic... From the point of view that it is the implementation of monetary policy there is not much difference.’
Piero Cipollone (ECB)
27 March 2024
‘Let me be clear: wage growth needs to moderate over the medium term for a sustained convergence of inflation to our target. But an excessive focus on short-term wage developments may not take into full consideration the recovery in wages that can – and needs to – take place for the euro area’s currently fragile recovery to gain a stronger footing. If the economy does not recover, this would mechanically put downward pressure on productivity growth or on employment. Today, the process of disinflation is surrounded by less uncertainty as supply shocks reverse and risks to the inflation outlook have balanced out. We are increasingly confident that inflation will converge to 2% by mid-2025. Waiting for further data before starting the normalisation of our policy rates, gives us additional insurance against upside risks to inflation. But we should remain proportionate going forward given an economy that has stagnated for 18 months, risks to the economic outlook that are skewed to the downside, and credit conditions that are in restrictive territory. If incoming data confirm the scenario foreseen in the March projections, we should stand ready to swiftly dial back our restrictive monetary policy stance. Increased confidence in a timely return of inflation to our target should then allow forward-looking information to regain prominence in our reaction function.’
‘The restrictive stance of our monetary policy has contributed to the stagnation of euro area real GDP in the last six quarters. Given that monetary policy operates with a lag, it will continue to exert a negative impact on economic activity, with growth projected to remain anaemic in the first quarter of 2024.’
‘While concerns about unit labour costs need to be taken seriously, there are grounds to argue that the current economic environment allows for a recovery in real wages in the short term that will not fuel inflation, provided real wage increases gradually come into line with productivity growth.’
‘While we must continue to carefully monitor the risks associated with wage growth that would exceed the projections, we also need to consider the symmetric risk associated with weaker than expected growth in wages. The failure of real wages to recover over the short term may have unintended effects.’
‘…paying attention to wages should not result in giving undue prominence to a factor that, while permeating all measures of observed and underlying inflation, is not the only determinant of cost pressures. The cost of intermediate inputs and profit margins, for instance, also matter. The current environment of disinflation means that the outlook is surrounded by less uncertainty as supply shocks unwind. We are becoming more confident in the projections. Indeed, the accuracy of staff projections for inflation has significantly improved in the past year, and the risks to the inflation outlook have balanced out.’
‘Since that [Governing Council] meeting [on 7 March], data have shown that the growth in compensation per employee moderated in the fourth quarter of 2023, in fact more than we had projected. And to date, evidence from the forward-looking wage tracker for 2024 does not suggest significant upside risks to the projections. Thus, while we should carefully monitor incoming data, wage growth appears on track to gradually moderate in the medium term towards levels that are consistent with our inflation target and productivity growth, in line with the projections. And as inflation declines, our current monetary policy stance becomes tighter relative to the inflation outlook. This gives us additional insurance against upside risks to inflation but, as our confidence in the timely convergence of inflation to our target grows, it also strengthens the case for adjusting our policy rates. If we hold them for too long, we might put the recovery at risk and delay the associated cyclical rebound in productivity growth. This would be economically costly and induce risks for the sustained convergence of inflation to our target.’
‘Inflation is declining, and a recovery from a protracted period of stagnation is on the horizon. As we become more convinced that the disinflation is sufficiently advanced, we must give the recovery a chance. The unwinding of supply shocks means that lower inflation and higher growth can be achieved simultaneously. This makes it possible for the economy to switch to a faster lane without endangering the disinflation process. Allowing the recovery to proceed will create the conditions for a more favourable disinflation path that is compatible with a sustained convergence to our inflation target. In turn, this means that there is scope for wages to rebound in the short term. In fact, this is one of the key conditions envisaged in the projections for the recovery to materialise, for productivity growth to pick up, and for both to be sustained. But as economic conditions normalise, wage growth should gradually moderate over the medium term to be consistent with trend productivity growth and our inflation target. The improving inflation outlook, continued strong transmission and further moderation in inflation all create scope for more confidence that we can dial back restriction. We are coming closer to the point when we will have the confidence to act.’
‘If we believe - and we should believe our projections, which, especially in the recent period, proved to be pretty good in figuring out where the system was going -- so we should be ready to discuss openly meeting by meeting whether how far we are from that path and adjust depending on what the data are. This means that basically we stick with our reaction function, we will be, again, data-dependent. As data confirms what we are doing, we can adjust.’
Joachim Nagel (Bundesbank)
23 March 2024
‘If the general conditions do not deteriorate, the inflation rate in Germany will continue to fall this year. The annual average inflation rate will be around 2.5%. In 2025, we will reach our target rate of 2% in the Eurozone.’
‘The probability that we will lower key interest rates before the summer break has recently increased. But for us to make this decision, we need to be sure enough that inflation will indeed continue to fall rapidly. The economic data that will be received in the near future will play a key role in this.’
‘It looks like when we take our three criteria, inflation outlook, dynamics of underlying inflation and the strength of the monetary [policy] transmission, it looks like at least for the moment, checking the data, that we are back to our 2% target on average in 2025. So, I guess this is good news.’
‘I believe now that the probability is increasing that we will see the first rate cut before the summer break. But I guess it is also important to say here that it is dependent on data… I guess this shouldn’t be perceived as an excuse.’
‘Does it mean that there is a sequence, maybe, if you start cutting rates, does it mean that there is a sequence of rate cuts? What I would like to emphasise here is that I do not see that there is a kind of an automatism if you start such a cycle that you are starting to cut rates that doesn’t mean that in the next meeting there’s another rate cut. As I said, that’s also true for all what’s happened after these meetings when we had the first rate cut. It is data-dependent and it is another done deal that everything is going smoothly for the rest of the year or maybe for next year. So, we have to be vigilant, we have to be cautious, and this is my understanding, my approach to monetary policy.’
‘I will not speculate here [about April cuts], in general we should remain cautious and vigilant and then we can discuss it in April. But as I said, if I could more or less put that into probabilities, definitely something in June has a higher probability than in April, this is for sure.’
‘Just to give you my understanding of where I see, maybe, the uncertainty as the reason why I said we should be cautious… Energy prices are an uncertainty. And not a surprise to you, wage developments, take for example Germany, so a lot is still in the pipeline, wage negotiations are ongoing. So I guess specially in June I think we will get a clearer picture about the wage development over the course of the year 2024, so wages uncertainty. Also, the profit developments are more or less the same, profits are still on a rather high level, so we will see. Is that something that might be maybe balancing out, maybe the higher wages we will see over the year, or some push regarding inflation coming from the profit side? There are still some open issues and, as I said, this meeting-to-meeting approach is the best way to address the current situation.’
‘The service sector and the inflation developments in the service sector seems to be rather sticky because of the simple fact that it is very labour intensive…. So yes, there could be a situation that we have really have to also very closely at the service sector gives you as an indication regarding the future development of inflation. So, as I said, I have some sympathy for the argument that service sector related to inflation seems to be more stubborn than maybe other sectors.’
‘We have to do our job, we have to fulfil our mandate, and this is for the Eurosystem, so the best way more or less to do this and to achieve your target is to make yourself independent from decisions that are taken [for] different reasons in other jurisdictions.’
‘It looks like, in terms of monetary policy, what I have to look at, it [fiscal policy] seems to be ok, it’s not triggering too much problems, in terms of what we have to do in the monetary policy side. But we should be very cautious, I think the extraordinary times they’re now more or less over, so we have to go back, not only in Germany, this is true for all European countries, back to a more sound and robust fiscal policy in terms of going back to our targets. And so for that reason I believe the debt brake is bringing an important role.’
‘I’m a strong believer in the fact that we really have to wait for the incoming data and not speculating too much what we might do in a situation where data is coming out in a certain way. But it looks like for the moment that April data or the April picture is not enough, maybe to change the level of interest rates. And so I believe, as I said, the probability is there that maybe something could happen in June, but I wait and I will see what I will learn from the data from the next meetings.’
‘Monetary policy needs some constructive ambiguity. Constructive ambiguity is also a very helpful tool to do monetary policy in a way that it has -- then, in the end when there is a decision -- that impact that is intendent. So I believe, we will give you clarity, but it’s too early to give you this clarity.’
‘Taking maybe the assumption there might be a first cut before the summer break this year, I said, first of all it’s dependent on the data, and then it shouldn’t be seen that there is then a kind of guarantee that there’s automatism of further rate cuts following the first rate cut. And I’m pretty much convinced if there is a first rate cut this year, we should take a very cautious approach regarding maybe the first rate cut.’
‘This is one of the things I would like to see, that core inflation is going down further, but where I take my confidence is related to the projections we did in our March meeting and gave me the confidence that there’s a high probability that we can achieve our target on average next year to go to 2%, so this is the reason why I say if we stay on track, there’s no time for complacency, this is also for sure, we shouldn’t declare victory about inflation too early. And yes, it’s right, so the last mile is the most difficult one in every interest rate cycle and we should stay our course. … We had also some episodes in the past where monetary policy [was] too enthusiastic, too optimistic, and the cut came too early and we all know in the end you have to pay this with a higher price when inflation is coming back…. We should not become too nervous and maybe too over optimistic about the inflation picture. We need a little bit more clarity here, especially when we’re talking about core inflation.’
‘Wages are a lagging indicator, so we all know that we have to take all the analysis capacity to find out ‘is it something that’s more sticky?’, ‘is it something that will stay on a certain level and not go back where we see it could not have a negative impact in our inflation target?’. But at the moment it is, as I said, and I have to reiterate on that, it is too early to come to this conclusion. I think this is a result of the high inflation rates we saw in 2022, 2023, this is the reason why it’s a lagging indicator, and now we have to find out if this is something that is diminishing overtime and it looks like if it goes on the same path, the same way it has in the past, I believe it is something that is diminishing over time. But, as I said, we need more clarity here. So I will stick to my position that this is the reason why I believe it is so important to have this meeting to meeting approach.’
‘And what makes me very confident is that market participants, i.e. more than 80% ... assume that if there are interest rate cuts, it could happen in June of this year at the earliest. So monetary policy is understood in the market. This is also important in order to provide confidence there, to reduce volatility on the markets and so that monetary policy can have its full effect here, too.’
‘That [a first rate cut in June] will depend on the data, that's for sure. We will go from meeting to meeting. Let me put it this way, the probability is increasing that we could potentially see a rate cut before the summer break. But again, that will clearly depend on the data, but the outlook has brightened in this regard, and I would like to note that too.’
François Villeroy de Galhau (Banque de France)
28 March 2024
‘…our monetary steering will need to be finely calibrated to ensure a successful landing. Given the balance of risks, I advocate a policy of agile gradualism; then, once the first rate cut has been decided, we will have two less frequently mentioned but more important choices, regarding the speed of the fall and the landing zone. The options markets are currently split down the middle, between inflation expectations that are still too high (overshooting the 2% target) and those that are too low (undershooting the target). This even balance of risks is good news, given that our target is symmetric around 2%. However, it masks a deeper debate. The “wait-and-see” school of thought is indeed worried about the last mile. Disinflation now needs to extend to the “core”, and primarily to services: it will therefore be different, they claim, harder, and will no longer benefit from the favourable base effects of energy disinflation. In economic terms, they assume that the Phillips curve will not be linear and will be less favourable now, and the “sacrifice ratio” higher. But there is no serious evidence to support this hypothesis. Admittedly, services inflation remains higher at 4%. But it has started to fall (after peaking at 5.6% in July 2023); historically, its average may have exceeded the headline target of 2%, but it is still compatible with it. Moreover, there are no signs of a wage-price spiral, which is important as wages are particularly decisive for services. On the contrary, average compensation per employee has slowed markedly, by more than we predicted in our December forecasts. True, services disinflation can hence be slower, but not more arduous; the last mile may differ in pace, but not in nature. Accepting this slower last mile may also provide protection against the risk of undershooting the inflation target. Moreover, we must not ignore the risk of weighing excessively on activity by keeping our foot pressed on the monetary brake for too long. The risks to inflation today are balanced; but those to growth are on the downside. We clearly have a primary target, which is our destination – bringing inflation down to 2% by 2025. There can be no doubt as to our determination and commitment, although I'm not overly concerned with getting to 2.0% to the exact decimal point. Keeping this primary target in sight, we now need to incorporate a secondary target for our trajectory: if we can reach our destination with a soft rather than a sharp landing, it will be a lot better for the economy, for our European citizens, their income and their jobs, and for the healthy conduct of fiscal policies. We cannot ignore the potential costs in terms of lost wellbeing. The time has come to insure against this second risk, by starting to lower rates. This insurance seems to me to be consistent with the rationale of those who, last September, argued for a final rate hike to protect us at that time from the risk of too high inflation: the risks have evolved, and we now need to adapt our insurance policy. Monetary policy itself acts with a lag, so waiting too long puts us at risk of finding ourselves “behind the curve”. If inflation then fell persistently to below our target, there would be a risk of us having to cut interest rates further and more aggressively, or even finding ourselves once again stuck at the effective lower bound. The exact date of this first cut – April or the start of June – is of no existential importance: let me reiterate here that I firmly believe it should come in the spring, and independently of the US Federal Reserve calendar. Regarding the disinflationary trend, weather conditions this spring are not necessarily the same on both sides of the Atlantic. It seems to me that there was emerging support for this active gradualism during our last meeting. Taking out this insurance policy is particularly worthwhile given that the costs of doing so are minimal: we will then have two choices for steering, two margins for manoeuvre, which from now on will be much more decisive than the timing of the first cut. A few principles seem to be generally accepted. We will probably start with a moderate cut. We will not then be obliged to cut rates at every Governing Council meeting, but we will need to keep that option open. The pace will above all be pragmatic and that pragmatism will be guided by the economic data. Among that data, as stressed by Christine Lagarde, our forecasts will become increasingly important again compared with “backward-looking” indicators alone as we become more confident in our models. However, the question of the expected speed also harks back to the debate about what guidance we should give to the markets. Refusing today to give excessive and unconditional “forward guidance” should not mean taking “deciding meeting by meeting” too literally. The main thing is that our future decisions should remain state-dependent, and not be made according to a pre-set calendar. Since we are talking about landings, let’s continue with the aeronautical imagery: autopilot – or long-term guidance – should only be used during stable phases of the flight; our economy is a long way from that. But using instruments to steer through the more difficult phases does not mean not giving any indications to passengers, for example on the landing in progress; they appreciate the information. Market expectations over the number of rate cuts, and then our “terminal rate” in 2025 after the cycle of cuts, have varied a lot since last September. At present, they appear to have more or less stabilised and to be more justified. That said, it would obviously still be premature to give a figure, especially when I’ve just been arguing for pragmatic gradualism. However, it seems reasonable to provide a few pointers here. Barring a very negative economic shock, we should not return to the ultra-low rates of the previous era, from 2015 to 2021. I want to stress this, because there is a risk that our collective memory – including that of borrowers and financial operators – may prove too short. Negative or zero rates were the exception, used to tackle the threat of deflation, which was even greater after 2020 because of Covid. Tomorrow’s inflation could be more volatile due to multiple supply shocks, but the average should be closer to our target of 2% over the medium term. The structural shifts we are seeing – such as climate change and the fragmentation of trade – are now creating a more inflationary environment. However, we have significant leeway to lower rates before our monetary policy becomes overly accommodative again. The economic debate gets excited here about the frontier zone – that of the neutral or equilibrium rate r*: the rate which, midway through the cycle, is supposed to balance supply and demand, and savings and investment as well by the way. It is both an essential structural variable and a key cyclical marker: it is meant to be the dividing line between a restrictive monetary policy – if inflation is too high, interest rates have to go above r* to curb demand – and an accommodative monetary policy. … This 2% to 2.5% range could be taken as a reasonable estimate of the average of ECB nominal rates over a future monetary cycle (it is also close to the average policy rate of 2.5% over the period 1999-2011). However, this range is not necessarily the target for the current rate-cutting phase: it simply shows that we have significant leeway to lower our rates before even exiting a restrictive policy stance. This is another reason for opting for agile gradualism over an excessive wait-and-see approach.’
‘Inflation is the first concern of the French, of course, and here we have the good news: we are in the process of winning the battle against inflation…. We are going to bring inflation down to 2% by next year. Why next year? Because 2% is our objective and it's not just a forecast from the Banque de France. I said this morning that, barring surprises, it's a commitment.’
‘I really believe that victory over inflation is in sight.’
‘Things are going in a very good direction. We remain, the Bank of France, at the ECB, very vigilant until the end, that is to say until 2%.’
‘Yes [rates could be cut from April], and perhaps more likely in June, but we will be very pragmatic. I have always pleaded for pragmatism; we will see according to the facts.’
‘We are winning the battle against inflation. Inflation has already returned to 3% and will go down to 2% by 2025, as the Banque de France had committed to doing. We will thus resolve the first concern of the French. The perception of this progress undoubtedly takes a little time because disinflation has been slower on food products.’
‘Inflation is the disease, and monetary policy is the cure. We have, with the ECB and Christine Lagarde, taken our responsibility by increasing rates, and it is working.’
‘Now we must guard against two risks. The first would be the haste in lowering rates, which would let inflation start again. The second would, conversely, be remaining tight, which would weigh too much on activity: this risk is now at least equal to the first. Rather than wait-and-see, we must therefore choose gradualism. Since our Governing Council last week, there has been very broad agreement for a rate cut in the spring... knowing that the spring lasts until June 21.’
‘This [the pace of cutting] is actually going to be the most important question now. How fast will we drop and to what “landing zone”? We will have to remain free and pragmatic about the pace, without tying our hands with past excesses of forward guidance. We have significant room for maneuver before returning to an overly accommodating policy: we will have to aim for the right rates, without going back to the zero or ultralow rates of the previous era.’
‘Today there is a broad consensus that the risks are balanced. We must guard against two pitfalls, that of haste, lowering rates too early and risking missing our inflation target of 2% and there is the pitfall of remaining tense, that is to act too late and weigh too much on activity.’
‘I would first like to remind you that the disease has been cured, that is to say that the monetary policy has been effective, inflation in the Eurozone was above 10% at the end of 2022, the latest figure is 2.6%. We are now increasingly confident that we will bring inflation down to 2% by next year. There is therefore a broad consensus on an upcoming rate cut.’
‘So there is a broad consensus that rates will be cut soon, or to put it another way, there is a broad consensus that gradualism is preferable to "wait-and-see" policy, which would mean waiting too long. I believe that gradualism is the best way to insure against these two risks, which are now symmetrical: haste, but also the risk posed by remaining tense.’
‘It seems very likely to me that there will be a first rate cut in the spring, I remind you that in Europe, as elsewhere, spring is a season that lasts from April until June 21.’
Fabio Panetta (Banca d’Italia)
28 March 2024
‘The global economy continues to be weak. The stagnation of international trade and the uncertainty raised by geopolitical tensions are weighing on economic activity.’
‘The restrictive monetary policy of the European Central Bank (ECB) is squeezing demand and contributing, together with the fall in energy prices, to the rapid decrease in inflation. The risks to price stability have reduced and the conditions for starting monetary easing are being created.’
‘Today … the ultimate objective of the European Central Bank it can only be the same: regaining price stability without unnecessary damage to the real economy.’
‘As I noted in a speech last February, inflation in the euro area is falling rapidly and continues to approach the 2% target, making it possible for a rate cut. It is in this direction that a consensus is emerging - especially in recent weeks - in the Governing Council.’
Pablo Hernández de Cos (Banco de España)
03 April 2024
‘The [March inflation] data were positive. ...And what is more important, these are data that are compatible with the forecast that the European Central Bank published after our March meeting. ...Those forecasts from the European Central Bank in the month of March, forecasts in which we have gained a lot of confidence, because we have now spent almost three, four quarters in which the forecast errors have been very small, contrary to what happened in the year 2022. And in fact, if perhaps it has been a somewhat lower inflation than we initially expected, also by the way, today's data are slightly better than what we anticipated. ...The fall in inflation that we have observed, I insist, is not only in general inflation, but in underlying inflation - and economists pay close attention to underlying inflation because that’s what has a greater degree of persistence and, therefore, is also capable of anticipating to a greater extent what is going to happen in that medium-term horizon - it has already fallen in a very significant way. We also have a lot of information that … monetary policy... is being strongly transmitted to financing and credit conditions in all countries in the euro area. That confidence that we have gained in the macroeconomic forecasts … makes us optimistic about the ability to achieve the ECB's inflation objective.’
‘Next week we will have to have a discussion in which we will share all our visions about what has happened since the last meeting, and we will see what the conclusion is, but I believe as of today that the central scenario is that June could indeed be the first reduction of interest rates, provided ... this is compatible with those macroeconomic forecasts.’
'This analysis confirms that a stronger than expected monetary policy impact remains a downside risk to the euro area growth outlook, as mentioned in our last monetary policy statement. Thus we shall be closely monitoring the materialisation of such risks and calibrate accordingly the degree of monetary restriction, in particular in a context in which our staff projections are currently anticipating a gradual return of inflation towards our 2% symmetric target in the medium-run and with the risks to the inflation outlook being, in my view, balanced.’
'Our monetary policy tightening is currently being transmitted forcefully to the euro area economy. Tighter financing conditions are dampening demand, and this is helping to bring down inflation. Moreover, a significant part of the pass-through of monetary policy tightening is still pending. Ultimately, however, the effectiveness of monetary policy in achieving its goal depends on how other policies are being implemented at the same time. Indeed, policies are more effective when their stances are mutually supportive. In this regard, macropudential policies that support a resilient banking sector create the conditions for a smooth transmission of monetary policy actions. Likewise, fiscal actions that adopt a medium-run perspective not only reinforce euro area governments’ commitment to public debt sustainability, but also help avoid additional inflationary pressures.’
‘To achieve the optimal policy mix at the current juncture, the ECB’s efforts to bring down inflation would greatly benefit from a fiscal policy with a medium-term orientation. This would not only make further interest rate increases less likely, but also help boost credibility, keep inflation expectations anchored and alleviate concerns about debt sustainability. In turn, macroprudential policies that support a resilient banking sector can create room for the transmission of monetary policy and smooth the impact of the tightening cycle on financial stability and on the supply of credit to the real economy. The policy mix would also greatly benefit from an ambitious plan of structural reforms to strengthen the supply side of the economy.’
‘We also continue to believe that risks to economic growth are on the downside. Growth could be lower if monetary policy effects or the weakening of the global economy are stronger than expected. But the greatest sources of risks remain geopolitical, associated with the war in Ukraine and the conflict in the Middle East. Inflation, on the other hand, has performed better than expected, mainly due to the stronger than anticipated correction in energy prices. ... The deceleration in inflation is expected to continue in the coming quarters, although in 2024 the decline would be slower due to upward base effects, the gradual withdrawal of fiscal measures taken during the energy crisis and the stronger persistence of services inflation, in line with historical patterns. ... This gradual reduction in inflation would be compatible with robust, albeit declining, wage growth, which would regain pre-inflationary purchasing power in 2025, as labour productivity is expected to recover and business margins are expected to develop moderately. ... For their part, in the face of weak demand and the resolution of bottlenecks, corporate margins are expected to act as a cushion to wage pressures, as indeed has already happened in the second part of 2023. Moreover, the risks around these inflation projections are, in my view, balanced. Risks to the upside include escalating geopolitical tensions, which could push up energy prices and freight rates more sharply. Inflation could also rise more than expected if wages rise more than expected or if profit margins become more resilient. But, conversely, inflation could be lower if the downside risks to growth mentioned above materialise. Against this background, at our March meeting of the ECB Governing Council we decided to leave policy rates unchanged at 4% for the deposit facility. But beyond this decision, I would like to take this opportunity to describe my vision for monetary policy going forward. Importantly, the inflation outlook anticipates that our inflation target will be met over the medium term. Moreover, the headline inflation path and most core inflation indicators have continued their downward trend. We have also been gaining more confidence in inflation projections, as forecast errors have been very small in recent quarters and have even been negative, i.e. inflation has been slightly below expectations. Furthermore, our assessment is that monetary policy continues to be transmitted strongly to financing conditions, which remain in broadly restrictive territory despite showing some signs of stabilisation. Credit growth also remains weak, and a part of our interest rate hikes has yet to be passed through to financing conditions. It should also be noted that these projections of inflation convergence towards our objective are constructed on the basis of market expectations of interest rate developments as of the cut-off date for the assumptions of the exercise, 9 February 2023. … In any case, we must continue to stress that the level of uncertainty remains high, which means that we must remain very attentive to the new information we receive and the implications it may have for the inflation outlook, and we will react depending on the data, without anchoring ourselves unconditionally to any monetary policy stance. In this regard, it is important to recall the symmetric nature of our inflation target that we unanimously endorsed in our review of the monetary policy strategy in 2021. As we stated then, this symmetry means that we should be just as concerned about deviations below the inflation target as we are about deviations above it.’
‘We are not making explicit guidance, but this is compatible with giving some indication to the market and citizens about what we can do in the future. If one takes into consideration the reduction in inflation in recent months (the underlying inflation as well), the weakness of growth in the euro area, the strength of the transmission of monetary policy, and if our macroeconomic forecasts are fulfilled in the coming months, it is normal for us to start reducing rates soon and June could be a good date to start.’
‘In accordance with the Eurosystem projections, in which we have gained a lot of confidence in recent quarters because the forecast errors regarding the evolution of inflation have been very small and even downward, the rate curve that we are observing at this moment in the markets is compatible with meeting our medium-term inflation objective of 2%. But I don't want to go any further. The level of uncertainty is very high, which justifies that we should not be very explicit about the time path of rates. In fact, the market yield curve is not fixed and reacts to the data that is received, in particular on GDP, employment and, of course, inflation.’
‘Again, our macroeconomic forecasts are now consistent with the inflation target being met in the medium term. According to these forecasts, inflation would reach 2% from the middle of next year and would remain at that level for the remaining quarters until 2026, which is the last year of this projection exercise. And we see that the upside and downside risks are balanced. At the ECB we now have a symmetric inflation target of 2%. This is one of the main novelties of the review of the monetary policy strategy that we adopted in July 2021. This means that we are equally concerned about deviations, both upwards and downwards, from the target. That is why it will be very important to properly calibrate the pattern of interest rate cuts in the coming quarters so that we avoid both too little tightening and too much tightening.’
‘We will have to have the discussion in April. But the central scenario as of today, if the forecasts come true, and we may have surprises in one direction or another, is the one I mentioned earlier. There are analysts who foresee lower growth in the euro area, which would generate a faster disinflationary process and, therefore, consider that the ECB should cut interest rates earlier or even that it should have already started to do so. Other analysts think the opposite. That is completely legitimate. But we have our own view. The important thing is to know how to react depending on how the data are proving you right or wrong and not to anchor unconditionally to any kind of monetary policy path.’
Klaas Knot (De Nederlandsche Bank)
14 March 2024
‘I have personally pencilled in June for a first rate cut. Where do we take it from there? We are data dependent, so I would focus on those meetings in which we have new projections, in September and December. But if incoming data tells us we can do more, the interim meetings should also be available.’
‘We are confident about the expected fall in inflation, but not yet quite confident enough to cut interest rates now. This will no doubt be possible later this year, if new data confirm our expectations. In this context, we are particularly interested in the how services inflation, wages, productivity and profit margins will develop. Indeed, for monetary policy to succeed once and for all, it is important that everyone plays their part. Trade unions by bringing wage demands back in line with inflation and labour productivity, employers by absorbing the temporary extra increase in wage costs into profits where possible. And the government by not pursuing fiscal policy that fuels inflation. Bringing inflation down to 2% is the most important thing DNB can do to make the economy work better. And I am happy to see that we now appear to be succeeding. Further good news is that the interest rate hikes appear to be causing limited damage to the economy. Although economic growth stalled last year, a fully-fledged recession has been avoided.’
Pierre Wunsch (Belgian National Bank)
13 March 2024
‘We are going to have to make a bet at some point.’
‘But it will remain a cautious move on the basis of what I know today because of the problem that has been commented again and again and again that service inflation and wage developments are still running at levels that are ultimately not compatible with our objective. But of course in our projections we have these going down so we are not going to wait until we see wage development at 3% before we cut rates. I guess we'll do it before and that's why I say it's important we need to take a bet.’
‘We’re getting closer to a moment where we can start basically acting on the fact that inflation has gone down, is moving in the right direction.’
Mārtiņš Kazāks (Latvijas Banka)
27 March 2024
‘Financial markets are pricing in that it could be in June and I don’t have any objection at the moment to that.’
‘Uncertainty is high and here we need to be very cautious — we don’t want inflation to revive — but at the moment it looks like this dragon is pinned to the ground.’
‘Inflation is low and will continue to fall in the whole Eurozone.’
‘We’ll lower cautiously, step by step’.
‘We need to see how the economy reacts to policy easing’.
‘If I take a look at the current market pricing, for the last month or so, I'm quite comfortable with that.’
‘I will not provide forward guidance saying there will be three cuts because we’ll take a look at each meeting.’
Cutting at projection meetings ‘more straightforward’.
‘Even if we start reducing the rate it's going to take some time before we get the neutral rate. By reducing the rate we only reduce the tightness of monetary policy, but it will remain restrictive.’
‘In the Eurozone, inflation is slowing down and approaching the 2% target; the weakness in the economy has dragged on, and we will not see rapid growth this year either; although the labour market is showing some slack, the labour market remains strong and unemployment is at historically low levels; wage growth is faster than price growth, and citizens' purchasing power is gradually recovering from the inflationary shock. … If the forecast comes true, then the inflation target – symmetrically around 2% in the Eurozone in the medium term – will be reached in about three years, which is an acceptable period of time for the medium term. … However, risks and uncertainty remain high. If for inflation, in my opinion, these risks are balanced, then for economic growth they are downward, that is, slower growth is more likely than faster growth. What about monetary policy? Although we did not talk about the reduction of interest rates in the ECB Council at the March meeting, we started a discussion about a possible reduction of rates in the future. Until recently, the risk of reducing interest rates too quickly and driving inflation rates up again, which would require rate hikes well above the current 4% to curb inflation (we remember the painful experience of the late 1970s and early 1980s in Europe and the USA!), was much higher than the risks of starting to reduce rates too late, then, in my opinion, these risks are now beginning to level out and there is no need to delay the reduction of rates too much. If the economy will roughly follow the forecast scenario outlined above, then the decision to start lowering interest rates could be made within the next few meetings. The financial markets currently have a rather similar vision, fully pricing in the first rate cut by 0.25 percentage points already in June. Inflation was rising very fast, and it has also come down fast. The goal of the Governing Council of the ECB is to return inflation to 2% and prevent it from rising again. Uncertainty remains high, so some caution is still necessary. Confident and safe, but cautious. One of the reasons for this year's lower-than-predicted inflation is natural gas prices. With the current unexpectedly low natural gas prices rising, inflation would rise again. The tension in the labour market is still high - although the rates of wage growth have become slower, they are fast and create risks for inflation to be "stubborn" and to decrease very reluctantly. Therefore, as before, we will base our decision-making in the ECB Council on a cool mind and current data. The dragon of inflation is pinned to the ground, a little more and it will be defeated.’
‘The first cut will be important, because that will show that we’ve changed the path. But in my view, it does not mean that we’re forced or obliged to cut each and every meeting. The optionality is always there. We don’t put anything on autopilot.’
‘Wage growth seems to be easing somewhat. We see some leading indicators also pointing to the same direction.’
‘Those risks of being too early and too late, I would say they are increasingly balanced.’
Olli Rehn (Bank of Finland)
16 March 2024
‘My view is that close to summer is the time to start easing the foot off the monetary policy brake. If inflation is sustainably stabilising at 2%, and no adverse shocks like an energy crisis materialise, I believe we have the preconditions to cut rates several times as the year progresses.’
‘The European economy, which stagnated to almost zero growth last year, is now slowly on its way to recovery, albeit more slowly than many previously estimated. Inflation has slowed towards the 2% symmetrical target, and monetary policy is still doing its job.’
‘An assessment of the tightness of the labour market is important when assessing future inflation trends and the need to change the measurement of monetary policy. The rapid rate of increase in wages maintains service inflation, which is currently the most important factor accelerating inflation. The faster-than-expected slowdown of inflation in the euro area is also good news because, with the strengthening of the real purchasing power of wage earners, the need to compensate for inflation in the form of higher salary increases decreases. Salary development is associated with significant uncertainty, which will take time to dissipate.’
‘Communication signalled a change. Before this week's meeting, the ECB Council had not discussed interest rate cuts. Yesterday, however, we started a discussion about how we start to take our foot off the brake of monetary policy, when the rate of inflation has turned out to be slower than predicted. In the language of economists: it is therefore time to discuss how we adjust the monetary policy to a lower level, i.e. reduce its restrictive dimensions. My own assessment is that based on the forecast that has now been received, the risks of premature interest rate cuts in terms of inflation control have substantially decreased. This is also affected by the lowering of the growth forecast. We will come back to the matter in the upcoming April and June meetings based on the latest information. There have also been voices in the discussion that the ECB could not lower interest rates before the Fed, the US central bank. Rumours about this are greatly exaggerated: the ECB is not the Fed's "13th Federal District", i.e. one regional central bank. The growth and inflation trends in Europe and the United States are currently so different that different paces in monetary policy are also justified. The ECB conducts an active monetary policy, and in the Council we make monetary policy decisions specifically from European points of view, next in April and June.’
Madis Müller (Eesti Pank)
26 March 2024
‘It can’t be ruled out that by June, when the ECB Governing Council again gathers to discuss monetary policy, that might be the moment where there might be enough confidence and it is possible to start reducing interest rates.’
‘…the Governing Council of the European Central Bank decided to leave the interest rates unchanged, because we need a firmer confirmation that the trend of falling prices will continue before starting with interest rate cuts. It is possible that this sufficient feeling of confidence will already arise based on the economic indicators of the coming months.’
‘In the last quarter of 2023, the pace of wage growth probably slowed down to less than 5%, but in the future, wage negotiations with trade unions that affect the labour market of major European countries, which are still ongoing, are important. The wage increase will help to improve the purchasing power that suffered during the period of rapid price increase, but unfortunately it is also clear that a wage increase permanently close to 5% would make it more difficult for the euro area inflation to slow down further.’
‘In a nutshell, the euro area economy is still stagnating, but there are increasing signs of increased economic activity and a return to optimism.’
Boštjan Vasle (Banka Slovenije)
08 March 2024
‘We estimate that the current level of interest rates, if maintained long enough, will significantly contribute to the timely return of inflation to the target level. Our further steps will continue to depend on the current situation, i.e. on economic and financial data, the movement of core inflation and the effectiveness of our measures. … Inflation will continue to decrease during the forecast period, and after external price pressures have subsided, the pace of future inflation reduction will largely depend on the movement of core inflation and labour cost growth. Inflation will average 2.3% this year, and in 2025 and 2026, if the disinflationary effects of monetary policy persist, it will further decrease to 2.0% and 1.9%. The continued decline in inflation, which has somewhat slowed down in recent months, maintains market participants' expectations for a cut in key ECB interest rates later this year, expecting the reduction to be more gradual and cautious than initially anticipated.’
‘We estimate that the current level of interest rates, if maintained long enough, will significantly contribute to the timely return of inflation to the target level. Our further steps will continue to depend on the current situation, i.e. on economic and financial data, the movement of core inflation and the effectiveness of our measures. Our decisions each time will ensure that interest rate levels are sufficiently restrictive for as long as it takes for inflation to return to our 2% target in a timely manner.’
Yannis Stournaras (Bank of Greece)
01 April 2024
‘Any adjustments in the conduct of monetary policy must follow a gradual approach so as not to cause undesired fluctuations in the markets. This applies not only to policy rate decisions, but also to developments related to the central bank's market footprint, i.e. the size of the Eurosystem's balance sheet. The recently announced operational monetary policy framework ensures that the implementation of the Eurosystem's monetary policy will remain effective, flexible and efficient in the future (as the Eurosystem's balance sheet is normalised), and takes into account the experience we have gained so far.’
‘This progress [in fighting inflation] has been achieved without causing recession or financial instability, suggesting that a "soft landing" of the economy has been achieved. However, the battle against inflation is not yet won, and uncertainty is very high. The European Central Bank will move cautiously towards a less restrictive monetary policy in order not to jeopardize the progress achieved so far. Also, the recent slight slowdown in wage growth is encouraging, and much will depend on the evolution of profit margins, as overall cost developments, including energy costs, suggest a further weakening of inflationary pressures in the near term. In my opinion, the end of the first half of 2024 would probably be the most appropriate time for our first rate cut, as long as the incoming data does not change the picture I just described.’
‘If inflation develops in line with our March forecast, and if this trend continues until the end of the year, I think we will see key rate cuts from the ECB this year. I personally think that cutting interest rates four times this year, by 25bp each time, is feasible. But this is not yet a unified view within the Governing Council of the ECB. Some colleagues are more cautious and believe that interest rate cuts should be more moderate.’
‘The differences of opinion within the Governing Council of the ECB are much smaller than the image in the media. The level of everyone's arguments is very high and one cannot automatically single out a "self-evident" solution. There is debate with valid arguments from all sides. And I have to say that Mrs Lagarde spends a lot of time building consensus around every decision. This is also why the ECB managed, in very adverse circumstances, to achieve a reduction in inflation in the Eurozone without a recession and without affecting financial stability, and especially the banking system.’
‘We are data-dependent. If our forecasts are confirmed, it is certain that in June we will proceed with the first reduction in interest rates. Already the Bank of Switzerland has begun. I will tell you that in the US where Fed members anonymously submit their forecasts in a table, the average forecast is for three cuts this year. We at the ECB do not have that. I spoke of four cuts, which I consider reasonable, as long as inflation continues to fall. Let us not forget that we depend on the evolution of inflation, but also on the rate of growth. Inflation is falling in Europe, but economic growth is also falling. Of course, we are not in the red; Germany and France are, but Europe as a whole is at 0.4%, at 0.3%.’
‘There is consensus that we will start in June.’
‘I'm not ruling it [that the ECB cuts before the Fed] out. We have no reason to wait for America, the reasons for inflation in Europe are different from the US. America has a very large fiscal package that gives a boost to the economy, we don't have anything similar. So I think the reasons for lowering interest rates in Europe today are stronger than in America.’
‘We need to start cutting rates soon so that our monetary policy does not become too restrictive. It is appropriate to do two rate cuts before the summer break, and four moves throughout the year seem reasonable. Insofar, I concur with the markets’ expectations.’
‘We will have only little new information before the April meeting, especially on wages at the start of 2024 — but we will get a lot more data before the June meeting. I think to cut rates already in April we will need to see the economy crashing and I don’t expect that.’
‘[E]conomic growth in the euro area is much weaker than expected and risks are to the downside, while inflation has come down significantly and the risks are balanced.’
‘So wages are still catching up, not leading inflation. We should not exaggerate the risk of a wage-price-spiral.’
‘On top of that [the pass-through of previous hikes], the ECB’s balance sheet will shrink by around €800 billion this year, through TLTRO repayments and the phasing-out of APP and PEPP reinvestments. Just as interest-rate hikes, this per se leads to tighter financial conditions too.’
‘I don’t buy at all the argument that we can’t cut interest rates before the Fed does so — and almost all of my colleagues agree with that. We are completely independent and the euro area is a large open economy with a flexible exchange rate. We have to do what is necessary for the euro area economy – nothing else.’
‘The case for rate cuts is much more conclusive for the euro area than for the US.’
Expect the deposit rate ‘to gradually go down to 2% at the end of 2025 or the beginning of 2026. … For the moment I don’t see rates go below 2% as it was the case before the pandemic.’
‘Although interest rates have remained stable since September 2023, past rate hikes will continue to be transmitted to financing conditions and the real economy to some extent well into this year as monetary policy operates with time lags. However, we do not expect any significant negative effects on the economy. According to the latest forecast, we expect growth to pick up from mid-2024 onwards. We can now say with great certainty that monetary policy measures have managed to tame inflation without significant side-effects on the real economy and financial stability.’
‘In order to start the cycle of easing ECB policy rates, we need to be confident in the ECB's Governing Council that inflation is steadily converging towards its medium-term objective of 2%. Indeed, significant progress has been made in slowing inflation in the euro area from its historically high level in October 2022 to date. Based on the latest forecasts, the slowdown in inflation is expected to continue in the period ahead. Specifically, it is forecast to reach 2% in the second half of 2025 and remain in line with the target until the end of 2026. The weakening of inflationary pressures is also confirmed by underlying inflation measures. In particular, core inflation in the euro area, measured by the consumer price index, excluding the energy and food sectors, continues to decelerate and is forecast to approach close to 2% next year. At the same time, the expected gradual weakening of wage growth, tight profit margins and productivity developments are expected to dampen the inflationary impact of higher labour costs. Moreover, the hitherto restrictive monetary policy will continue to be transmitted over the period ahead, both to financing conditions, affecting borrowing rates and credit growth, and to the real economy, further dampening demand and price growth. However, uncertainty about the outlook for inflation and economic activity remains elevated, also due to global developments and geopolitical shocks. I believe that, on the basis of economic data that will become available during the second quarter of the year, we will approach the point at which we can reduce policy rates without jeopardising the progress towards price stability achieved so far.’
Peter Kažimír (National Bank of Slovakia)
11 March 2024
‘Inflation is coming down, and we’re progressing well towards our target. That’s enhancing confidence, which is gradually building up. But we’re not there yet. The slowdown in inflation remains fragile. We can’t take it for granted. Upside inflation risks are alive and kicking. Wage pressures show signs of moderation, but remain far too high and can prove more inflationary if productivity growth does not start picking up. Gas prices have fallen to lows we have seen a long time ago, but developments could easily reverse. The green transition will affect the inflation path in the medium term in ways we do not currently account for properly. Let me add one important element: looser fiscal policy in Europe. The outlook here looks uncertain and could carry upside inflationary risk. We need to stay cautious and wait for more hard evidence where we can get it. Wait for and analyse additional data, the additional confidence boost. Important pieces of the puzzle will arrive in the next couple of months. We will learn a bit more in April, but only in June, with new forecast at hand, will the level of confidence reach the threshold. This doesn’t mean we won’t discuss how to dial back our restrictive policy stance in the meantime. On the contrary, we will use the weeks ahead to do just that. We will investigate how to design a good easing strategy. How to proceed to safeguard inflation’s return to the target while helping the economy rebound in an uncertain global environment. As for the exit strategy, I prefer a smooth and steady cycle of policy easing. For that, we have to be confident about the first step. Like descending from the peak’s summit to the base camp. The current picture clearly favours staying calm for the coming weeks and delivering the first-rate cut in summer. A decision to cut rates now is still a premature reduction, which would be at risk of pausing or even reversing should some developments not fall into place. That could dent our credibility. Ultimately, the risk of undershooting our target is still significantly smaller than the risk of acting prematurely.’
Mário Centeno (Banco de Portugal)
22 March 2024
‘We have a principle, which I will not deviate from, that decisions are made meeting by meeting and with all known data. In March, we had a new forecast for the next three years also in the euro area, and in this forecast, the inflation profile was revised downwards. Very significantly down in 2024, a little less in 2025 and 2026, but with one detail: from the second quarter of 2025 onwards, inflation is below the target. And this reflects what we have been saying systematically since the beginning of the inflationary process -- the anchoring of inflation expectations in the medium term, which is what interests us, as central bank governors -- that the inflationary process was in essence temporary.’
‘The truth is that the inflationary process was very significant, it required the biggest reaction ever from the European central bank in terms of its decisions on interest rates, but inflation is falling in a sustained manner and converging towards 2%. Now in April we will have some additional information, one that we don't have yet, which is inflation in March and some additional information about salaries. And what we have already learned about wages, which were one of the most talked about variables since the beginning of the year in terms of monetary policy in Europe, was that wages in the fourth quarter of 2023 grew well below what they had grown in previous quarters, little more of 3% and we saw a number in the third quarter above 5% year-on-year. We have to analyse this number carefully, we have to place it within the framework of our reading of the different indicators of the euro area, but there is no doubt that an economy that has not grown for a year and a half, quarter after quarter, that continues to create jobs… that economy has to adjust something.’
‘One of the variables that can be adjusted to preserve employment are wages and wage dynamics, and my personal reading is that this slowdown in wage growth in the euro area is an essential condition for all the economic forecasts to materialise. Because we cannot continue to not grow, to increase employment and to increase salaries, this is not an economy is sustainable. And therefore, the best answer is that we have to analyse the wage data, and when we meet at the beginning of April we can make decisions. But decisions are only made when we have all this information and there is still some time to get there, so I will not anticipate any decision, not even my own decision because I will have to look at all the data that we will also receive by then.’
‘The answer that can be given from an economic point of view is that if there are salary increases that are not aligned with productivity and the 2% margin for inflation, they are absorbed by the margins. We don't have very firm evidence that allows me to say whether this is happening or not. What I said there was that given the cyclical situation of the economy, and it is expected that companies that intend to behave in their salaries that are out of line with these control variables... will use other internal margins to accommodate these increases. This is natural, if you like, it is almost a hypothesis based on the historical behaviour of these variables. There is no obligation for this to be the case, and it is a result that we consider to be expected. And now we do whatever pedagogy we can to ensure that this is the case, because monetary policy involves a lot of managing expectations and sending messages as positive as the ones I'm sending here today.’
‘At the moment we aren’t talking about recession in the euro area - the region has been stagnant in economic terms for practically a year and a half. Probably when the decline in interest rates starts to materialise, it will be one of the factors that can help avoid the appearance of a recession.’
Gabriel Makhlouf (Central Bank of Ireland)
20 March 2024
‘The good news is that inflation is now in the process of coming down. I’m hopeful that the very rapid increase in interest rates will now have reached what I’ve described as the top of the ladder — it’s now the question of how long we stay at the top of that ladder.’
‘The current data we have suggests that measures of underlying inflation have eased further, which gives us more confidence about returning to our 2% medium-term target. Against this, domestic inflation remains high, in part driven by strong growth in wages putting upward pressure on services prices. This is an area we will continue to monitor closely. … In light of these new projections, how do I see the interest rate path? Given the continued disinflation we have seen and progress on underlying inflation, it’s becoming clear that there is scope for a change in our monetary policy stance, and, specifically, to make it somewhat less restrictive. I remain open-minded as to when any reduction in our policy rates should take place. As I have emphasised before, while our data-dependent approach allows us to make informed and timely policy decisions, it also means having an open mind on the rate path, including the need to hold for longer, should progress on returning inflation sustainably to target be threatened by further shocks, or wage growth turns out to be inconsistent with achieving 2% inflation over the medium-term. The history of monetary policy tells us that rushed decisions tend to be wrong decisions. Patience is a virtue. But waiting for clear and unambiguous evidence is also not realistic and we have to manage the uncertainty and make decisions on the evidence in front of us. My current view is that the picture should be sufficiently clearer when the Governing Council meets in June (as we will have a lot more information – particularly on wage dynamics – available in our deliberations) to give us sufficient confidence to make monetary less restrictive.’
‘When we get to the point of feeling, actually, you know, we’re confident enough about meeting our target, then we’ll recalibrate the stance and reduce our policy rates. But I expect the stance to remain restrictive for some time – but just not as restrictive.’
‘We have greater confidence that we are on track, but we haven’t got sufficient confidence, or certainty yesterday we hadn’t got to the point where we have sufficient confidence to decide that out monetary policy stance needs to change.’
‘I think that gradual change in the stance is the best way of adjusting and communicating to markets what we’re doing, rather than a sudden decision that recalibrates us in that way. I think that [large individual cuts] is probably unlikely, simply because the data is never that definitive.’
‘It’s not a mechanistic thing – the forecast said this, therefore, we need to do X.’
‘The forecasts are what they are. Some people believe in them much more strongly than I do. I always think that there is so much judgement you have to exercise, because the tendency of forecasts is that they tend to use backward-looking information, and there’s a lot of judgement involved in the forward look.’
Gediminas Šimkus (Bank of Lithuania)
08 March 2024
‘June is the possible month for a rate cut.’
‘I can’t rule out a possibility of a cut in April but the likelihood is low.’
‘We’re not in a rush. I don’t see why the cuts should be larger than 25bp or why they couldn’t coincide with forecast releases.’
Robert Holzmann (Austrian National Bank)
03 April 2024
‘April is not on my radar. In June we will have more information.’
‘If the data allows it, a decision will be made. I don't have an in-principle objection to easing in June, but I'd like to see the data first and I want to stay data-dependent.’
‘If by June the data shows a strongly based environment for a cut, a week before the Fed makes its own decision, then quite likely we'll do it, hoping that the Fed comes along. If it doesn't come along, then it may reduce the economic impact of our move.’
‘If the productivity gap towards the U.S. is as wide as now, then even [a deposit rate of] 3% may be too tight.’
‘Wages are definitely a risk with respect to inflation, but we've also seen that enterprises, if their price setting power is decreased, will have to accept lower prices.’
‘Europe could cut interest rates before the U.S.’
‘From today's perspective, I'd say: interest rate cuts are likely to come. When will depend largely on what wage and price developments look like by June.’
'Yes, such [a rate cut] is in preparation at European level. My personal view on this is that the timing cannot yet be determined because we are all committed to data dependency. In other words, we don't yet know the data for June. As you know, there will be forecasts in June, which will be participated in not only by the ECB, but by everyone, including the national central banks. There we have the information about what has happened in the first half of the year, then what are the forecasts for inflation given the monetary policy decisions to date, what will develop in the future. A decision is then made based on this. My own assessment is that we need to exercise a little restraint here. But at European level, there is more optimism here than I share. So, my statements are completely consistent with this.’
‘The decision is not made by me, but by the GovC. And there are different assessments within the GovC, of course. And if I then follow what is happening, then there are a number of people who believe that developments in June will probably be such that we get to a cut. ... My own assessment is that it could be that way, and if the data are that good, I have no mental reservation against falling interest rates. It’s just that my judgement economically is that inflation may be stickier than a number of people think it is ... and I think if you look at the historical examples, and this is also shown in recent developments ... it's going to be a bit more difficult here. So, I'm waiting for the June data and then we'll see.’
12 March 2024
‘We have reason for some optimism. At the same time, we have been misled by projections before, so let's stay data-dependent and open to acting when we need to act, but also not acting prematurely.’
‘But there are some residual doubts as to whether this[the sustainable convergence of inflation to 2% next year] will be the case.’
‘The vision for June is very much related to the extent to which our projections turn out to be true. But it might be that some of the assumptions built into those projections are somewhat optimistic, so we have to remain data-dependent.’
‘We also won’t have any ECB projections, so it could be premature to make a judgement [in April].’
‘China is struggling. It may be that the economic problems there are stronger than feared, and this could take a few tenths of a percentage point from European growth rates, which in turn would have a disinflationary effect and mean rates have to go lower.’
‘If and as the data are strong enough for the ECB to cut first then it could happen, but it is not without risk of some market repricing - especially if the Fed decision is linked to some sudden, major change in inflation or employment data. Europe is not the 13th district of the Fed, but what the Fed does matters.’
‘One of the decisions yesterday was no change, but a change may be in preparation.’
Boris Vujčić (Croatian National Bank)
15 March 2024
‘If there’s a significantly faster slowdown of the economy, that would then of course have consequences for interest-rate policy. Given where we are right now, probably not affecting the timing of the first cut, but it could have an effect on the pace.’
‘The problems that we see in Germany are more of a structural nature, rather than cyclical. They’re connected on one hand with energy costs, a problem that existed already before the energy price shock following Russian invasion, and, on the other hand to the car-industry transition to EVs. That shouldn’t be confused with the rate cycle.’
‘“It would be best to have a gradual adjustment of monetary policy, which means a series of 25bp cuts. At which pace, we’ll have to see later on.”
Gaston Reinesch (Central Bank of Luxembourg)
14 March 2024
‘The incoming data and the latest ECB staff macroeconomic projections made the Governing Council more, but not yet sufficiently confident about a timely return of inflation towards its medium-term target. On 7 March 2024, the Governing Council therefore again decided to keep the three key ECB interest rates unchanged at 4.00% (deposit facility), 4.50% (main refinancing operations) and 4.75% (marginal lending facility). The Governing Council also restated it will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. Provided the incoming data will confirm, in the light of the June 2024 Eurosystem staff macroeconomic projections, the current prospect of inflation returning timely to its 2% medium-term target, it is not at all groundless to anticipate a first rate reduction towards the end of the second quarter of 2024.’
‘The outlook for domestic price pressures, as reflected in labour cost and profit growth, remains uncertain at this stage. Moreover, the downward revision to HICP inflation in 2024 according to the March 2024 ECB staff projections is mainly due to the more volatile energy component.’
Constantinos Herodotou (Central Bank of Cyprus)
NO UPDATE
Edward Scicluna (Central Bank of Malta)
22 March 2024
‘We have a data-driven, meeting-by-meeting approach, so I would be cautious about jumping to conclusions regarding future meetings. Everybody was aware that March would be important because we would have new macroeconomic projections. And since the outlook was in fact revised downwards, in that sense, March was the chance to act. If you don’t , then the onus is on you to give reasons for not acting. Now, April is different. We have some new data coming in, but no new projections. Let's say we go for a cut in April; then what reasons are you going to give? One can say that now we’re sufficiently convinced. So one cannot exclude April. It's not ideal in the sense of not being a result of data based on revised projections. One could even argue that it could appear like an admission that it could have been done in March. However, notwithstanding that one was not sufficiently convinced in March, still it could only take a little bit more time and some additional data to push to where April becomes a possibility. Even though everyone is talking about “June, June, June”, April does indeed become a possibility.’
‘There was talk of June before the projections were updated in March, and at the time, expectations were that the projections would not be revised down. June is something we hinted at prior to the projections. So, it’s not a matter of going back on our word, because mention of June predated the newest projections. Now, the numbers have come out and we said, “Not yet.” Of course, individual governors can talk about June or the summer and all that. But April is not impossible or even improbable.’
‘I would not use that phrase “behind the curve” yet to describe where we are. Because it depends on how much we're choking the economy with our interest rates. The restrictiveness of our stance was for a reason. And now that the economy is helping with lower demand, we shouldn't over-burden activity any longer. Furthermore, regarding our revised inflation target, especially now with the symmetry of our monetary policy strategy, it no longer makes sense to speak of “killing the monster” of inflation. There's no such thing. It's a bit like Covid – there’s no point in denying that it's going to be with us, it’s here to stay, even if not at super-high levels. And nobody wants super-high inflation either, but we’re not going to “kill” it off entirely. So, I don’t agree with the terminology of “killing the monster” or “declaring victory”. One shouldn't use those words. And when somebody uses them in public discussion, it's just trying to show hawkishness. I would prefer to speak of good policy. Inflation is with us and of course as economists we know that some inflation is essential. That’s why when we had deflation, we were also scared. So, especially now with symmetry, we made it so clear that we need to allow 2% inflation. Maybe people in the streets don't fully understand that. But as economists we should understand that 2% inflation is not only safe, but actually healthy and desirable.’
‘There is new information before the April’s meeting: we have the labour cost index, HICP for February, flash HICP for March, the index of services production for January. And let's face it, all these are also part of the trend. So, you could justify why you want to move in April, because you have indications that the downward trend is continuing. So April and June are both evenly balanced. Depending on the size of the rate cuts one can avoid falling behind the curve.’
‘This is a difficult issue: whether we’ll have a series of cuts, how much each would be in turn, whether there will be three this year, whether we ease by 100bp in total by the end of the year, and so on. But honestly, if I'm true to myself, and if we said that we'll stick to a meeting-by-meeting, data-driven approach, how much clarity can we provide ahead of time? You can try. But has uncertainty diminished? If so, that's fine. Because that was the only reason when we switched from giving forward guidance to being data-driven. That didn't mean that we were not data-driven before, of course; it's basically a euphemism for saying, “Look, we can’t go beyond one meeting at a time, because the uncertainty is so thick that we have to proceed meeting by meeting.” But on the other hand, if that uncertainty remains, and it does, then it would be pure speculation for me to talk about such details.’
‘Developments have been quite moderate, nothing we can’t live with, and I cannot see anything like a wage-price spiral. I’m not saying we don’t need to monitor developments, of course. We just don’t need to make a mountain out of a molehill.’
‘You need to be really, really sure of yourself and what you're saying in order to announce three or any other number of cuts in succession. I think most of us will want to stick to the meeting-by-meeting, data-driven approach.’
