In a speech overnight, ECB Executive Board member Piero Cipollone suggested that additional tightening of monetary policy may not be necessary to rein in inflation. His remarks hint at a potentially less restrictive approach going forward, should inflationary pressures continue to subside.

Cipollone emphasized that the current economic conditions, “with demand still weak and inflation expectations anchored”, arguing against the need for monetary policy to “generate further slack to keep inflation in check”. This perspective underlines a significant shift from aggressive tightening to a more measured stance, possibly preparing the ground for a more accommodative monetary policy in the near future.

Unwinding of supply shocks offers room for demand to pick up “without fuelling inflation”. Additionally, the downturn in energy prices could allow for “some wage catch-up, especially if profits normalize.”

However, Cipollone also stressed the importance of a balanced approach to policy-making, pointing out that the path to the ECB’s inflation target would depend on a complex interplay of economic factors. Consequently, he advocated for a “data-driven” approach to future monetary-policy decisions.

Full speech of ECB’s Cipollone here.

In a newspaper interview published on Sunday, ECB Governing Council member Pablo Hernandez de Cos spotlighted the upcoming economic projections in March as a crucial factor in determining the timing for interest rate cuts.

De Cos outlined two primary considerations that the March projections will address: the confidence level in achieving ECB’s 2% medium-term inflation target and the determination of an interest rate path that aligns with reaching this symmetric target.

Reflecting on past challenges, de Cos acknowledged the ECB’s initial underestimation of the inflationary surge post-pandemic and following Russia’s invasion of Ukraine.
However, he noted a marked improvement in the accuracy of staff projections, highlighting recent instances where inflation figures came in slightly below expectations.

De Cos’s remarks suggest a positive outlook on Eurozone’s disinflation process, describing it as “well advanced” and likely “to continue in the coming quarters.”

ECB Council member Fabio Panetta articulated a sense of urgency for ECB to loosen its approach, suggesting that “the time for a reversal of the monetary policy stance is fast approaching.”

Panetta advocates for a nuanced evaluation of the timing and methodology of interest rate adjustments, contrasting the implications of initiating “quickly and gradually” against opting for “later and more aggressive” measures. He warns that the latter could “increase volatility in financial markets and economic activity”.

The backdrop to Panetta’s remarks is a macroeconomic conditions characterized by significant disinflationary progress at an “advanced stage”, with progress toward 2% target “continues to be rapid.

He emphasizes the absence of any “upward de-anchoring of inflation expectations,” pointing instead to emerging downside risks. This observation effectively counters concerns over enduring high core inflation, which Panetta now deems “groundless.”

The crux of Panetta’s argument lies in the potential consequences of delayed policy adaptation. “If monetary policy were to take too long to accompany the ongoing disinflation, downside risks to inflation could emerge that would conflict with the symmetrical nature of the objective set by the ECB’s Governing Council,” he said.

ECB Governing Council member Francois Villeroy de Galhau, in an interview with LCI television, anticipates reducing interest rates within the year, marking a significant move away from the aggressive inflation-fighting measures.

“We will probably cut rates this year because we are making progress against inflation,” Villeroy stated.

“We are exiting the emergency of fighting inflation and are on the right path to overcome the sickness,” he elaborated.

Further bolstering this positive outlook, Villeroy projected gradual acceleration in economic growth in France in the coming months, fueled by decline in inflation rates that is expected to fall below pace of wage increases.

Bank of France’s forecast, as mentioned by Villeroy, anticipates avoiding a recession, with an expected expansion rate of about 0.9% for the year.

ECB Governing Council member Martins Kazaks provided a tempered outlook on the prospects of interest rate reductions within Eurozone, cautioning against premature expectations for cuts as early as spring. In an interview with Latvijas Radio, Kazaks outlined his stance on the timing and conditions necessary for beginning to ease ECB’s monetary policy stance.

“At the moment, there are expectations that the rates could be cut in the spring, in March or April — I wouldn’t be optimistic,” Kazaks stated. He advocates for a patient and data-driven approach, emphasizing the importance of ensuring that inflation trends are firmly under control before considering rate reductions.

“I would be cautious and I would wait until the inflation story is over. Then we can safely breathe and those rates can be lowered step by step,” he elaborated.

Looking ahead, Kazaks indicated “Summer could be that moment”. However, he cautioned that would depend on incoming data. “If nothing negative happens, that pushes up inflation and geopolitical risks, if nothing like that happens then this will be the year that rates start to be lowered,” he added.

ECB Chief Economist Philip Lane highlighted in a speech that recent data suggest the disinflation process “may run faster than previously expected” in the near term. However, he was quick to note that the implications for medium-term inflation remain “less clear”.

The economic recovery’s strength, fiscal policy paths, wage developments, firms’ capacity to absorb higher input costs, and ongoing geopolitical tensions are all pivotal factors that Lane identified as having an “important bearing” on the inflation trajectory.

Lane also emphasized the significance of March 2024 ECB staff macroeconomic projections as a critical juncture for providing a “comprehensive update” of medium-term inflation outlook.

In terms of policy approach, Lane reaffirmed ECB’s commitment to a “firmly data-dependent approach,” stressing the importance of striking a delicate balance between the risks of overtightening and prematurely easing monetary policy.

“Monetary policy needs to carefully balance the risk of overtightening by keeping rates too high for too long against the risk of prematurely moving away from the hold-steady position,” he stated.

Furthermore, Lane stressed the importance being “further along in the disinflation process” before gaining confidence that inflation will consistently meet ECB’s target in a timely and sustainable manner.

Full speech of ECB Lane here.

ECB Governing Council member Pierre Wunsch said today, “I’m on the side of those that believe there’s some value to waiting” before cutting interest rates.

Nevertheless, Wunsch also acknowledged the inherent uncertainties in economic forecasting and the eventual need to make decisions based on the best available data. “But again, we won’t get full comfort. So at some point, we’ll have to look at all the information we have and take a bet,” he said.

A critical factor in Wunsch’s cautious stance is the current state of wage growth within Eurozone. He pointed out that wage increases are occurring at a pace that may undermine ECB’s efforts to bring inflation down to 2% inflation target. Were it not for the uptick in salaries, ECB might already be in a position to initiate monetary easing.