ECB Officials Debate If a Half-Point Cut Really Needed: Overview

(Bloomberg) -- Views among European Central Bank officials about where to take monetary policy are starting to diverge as the institution’s 2% inflation target moves within close reach.

As policymakers gather in Washington for the International Monetary Fund’s annual meetings, some of the more dovish officials are openly discussing the need for steeper interest-rate cuts, while their hawkish colleagues are urging for caution. They, too, stress that borrowing costs shouldn’t restrict the economy for longer than needed, but maintain that the fight against heightened price pressures isn’t yet won.

Last week, the ECB cut rates for a third time this year, bringing the key deposit rate to 3.25%. Economists and traders expect more reductions in the months ahead.

What follows is a list of highlights from interviews and comments published this week:

Christine Lagarde, President:

“I think for me, the direction of travel is clear. What we have done starting in June is I think the sensible approach and one that should be continued with that caution element about it.

“You will have people the whole week saying, oh, it should be 50, it should be 25. No. Direction of travel clear, pace to be determined on the basis of backward- and forward-looking element using the three criteria and applying judgment.” 

Philip Lane, Chief Economist:

There’s “high conviction that the disinflation process is well on track, but at the same time we have a projection of unemployment remaining low, of consumption growing, of investment recovering.” 

While some recent data have raised questions on growth projections, the economy in the 20-member region isn’t showing signs of “dramatic weakening.”

Joachim Nagel, Governing Council member from Germany:

“We shouldn’t be too hasty. We will have all the optionalities and these optionalities are based on the data that we have in December.”

Francois Villeroy de Galhau, Governing Council member from France:

“We are not behind the curve today, but agility should prevent us from running such a risk in the future. The risk of reducing too late our restrictive stance could indeed become more significant relatively to the one of acting too quickly.

“If we are next year sustainably at 2% inflation, and with still a sluggish growth outlook in Europe, there won’t be any reasons for our monetary policy to remain restrictive, and for our rates to be above the neutral rate of interest. When victory against inflation is in sight, monetary policy shouldn’t inflict excessive or prolonged restraint to activity and employment, and hence to our fellow citizens.”

Fabio Panetta, Governing Council member from Italy:

“There’s a combination of low inflation and weak growth, and clearly this is conducive to further loosening of our monetary policy.” 

Given the ECB is likely to reach its 2% inflation target “much earlier” than at the end of 2025 as envisaged in its September projections, the direction for rates is “clear” and a necessity to lower borrowing costs below a neutral level can’t be excluded.

Jose Luis Escriva, Governing Council member from Spain: 

Upside and downside threats to the inflation outlook are about equivalent. “Inflation service inflation is declining, but still is, there are some degree of stickiness.”

Klaas Knot, Governing Council member from the Netherlands:

“I cannot exclude anything, but it would seem to me that we would need to see quite some deterioration in the outlook before we have to worry about the risk of a structural undershoot. And that might then of course affect the pace with which we bring rates back to neutral. That might in that scenario accelerate that pace.”

Pierre Wunsch, Governing Council member from Belgium:

“I don’t see why we should have discussion on a 50 basis point in December. I think really it’s premature.”

Robert Holzmann, Governing Council member from Austria:

“I’d say a quarter-point step is probable in December. A bigger half-point cut is unlikely though not impossible. But we might also conclude that preemptively cutting in October might have been sufficient to take a break in December.

“I’m still concerned that inflation might prove stronger than expected. Of course there are downside risks as well — though I don’t see enough of them to conclude that they dominate. I believe risks being tilted to the downside is still a minority view in the Governing Council.”

Gabriel Makhlouf, Governing Council member from Ireland:

The preference is for a “cautious” approach to ensure that inflation’s retreat to 2% stays on track.

“The data has to be very powerful for me to feel that I need a leap. Historically you leap if you’ve got some big catastrophe that’s happened, or because the data is telling you you’ve got to get on top of something very quickly.”

Olli Rehn, Governing Council member from Finland:

“Disinflation in the euro area is well on track. The growth outlook has weakened quite clearly in the past few months, which could also increase disinflationary pressures. We have to be mindful of — possibly also concerned about — the possibility of inflation undershooting.

“For the moment I am not yet at least so concerned about that because services inflation and wage inflation are clearly about our 2% target. The danger of undershooting is not yet verified.”

Peter Kazimir, Governing Council member from Slovakia:

“Our decision to lower rates in October leaves the December meeting wide open. All options remain on the table.

“I’m increasingly confident that the disinflation path is on solid footing. But the Doubting Thomas in me still needs to see further proof of a sustainable return to target.”

Mario Centeno, Governing Council member from Portugal:

“We don’t need to restrict ourselves to a metric of moving only in quarter-point steps. For an economy that spent 10 years with average inflation of 0.9%, for an economy that is not investing, for an economy that is supported by a labor market that shows some signs of weakness, we need to consider the possibility of moving in bigger steps.

“We keep postponing the recovery and downside risks are materializing. This is probably a good definition of being behind the curve.”

Boris Vujcic, Governing Council member from Croatia:

“I’m completely open to any discussion in December.” 

“Personally, I don’t know what the decision will be, nor I think we should know at the moment, because we should wait if we are data dependent, we should not now talk about 25 basis points versus 50, or maybe a pause in December. Anything can happen depending on the incoming data.”

Gediminas Simkus, Governing Council member from Lithuania:

“As I read data, I don’t see a case for 50 basis-point cuts. What matters more than a single cut is where we’re going to.” 

Bostjan Vasle, Governing Council member from Slovenia:

“The direction for policy is clear but I would still be very cautious regarding what we’ll do during each of the next meetings.”

“I’m comfortable with being data dependent. I wouldn’t like to pre-commit to anything, let’s wait for the data.”

Martins Kazaks, Governing Council member from Latvia:

“We shouldn’t hold rates at high levels for longer than necessary — because otherwise we would do more damage than necessary to the economy and to citizens.” 

Still, despite inflation coming down “much faster than expected,” domestic price pressures are “somewhat sticky,” uncertainty is high and risks like the Middle East, energy prices and US elections persist.

Therefore, “it makes sense to go step by step.” 

Madis Muller, Governing Council member from Estonia:

“With increased confidence in reaching our target it makes sense for us to keep gradually cutting interest rates, moving at a measured pace. “I’m not worried about falling behind the curve.”

Christodoulos Patsalides, Governing Council member from Cyprus:

“If there are no upside surprises to inflation, then we could and should continue lowering our interest rates. December is an important month because a lot more data will be available, including new projections. So, we will be in a better position to assess our stance.

“Risks to growth are clearly to the downside. But it’s not as clear that the inflationary path is tilted in the same direction, also because of potential supply shocks, oil prices and trade wars. Risks to inflation are more or less balanced and we shouldn’t ignore the upside risks.”

--With assistance from William Horobin, Viktoria Dendrinou, Lisa Abramowicz, Kailey Leinz and Joe Mathieu.

(Updates with Vasle)

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