Battle lines are forming for the European Central Bank decision next week, with one official calling for a whole campaign of new tightening and some colleagues favoring caution.
(Bloomberg) — Battle lines are forming for the European Central Bank decision next week, with one official calling for a whole campaign of new tightening and some colleagues favoring caution.
Toward the dovish end of the spectrum, Chief Economist Philip Lane on Monday acknowledged the need for more increases after a half-point move penciled in for March 16, but warned against policy on “autopilot.” Portuguese central-bank chief Mario Centeno highlighted that inflation is even undershooting ECB forecasts.
Meanwhile Austria’s Robert Holzmann, possibly the most hawkish policymaker, shook bond markets by speculating that next week’s move will be just the first of four in 50 basis-point increments.
That followed remarks by Belgian colleague Pierre Wunsch on Friday that investor bets for a 4% rate peak — still 150 basis points away — may prove accurate.
Those declarations show how officials are seeking to steer a debate already focused on future meetings in the final hours before a blackout period takes effect a week in advance of next Thursday’s decision.
Underscoring an outcome already long signaled, ECB President Christine Lagarde appeared to strengthen her language on Sunday to state that a half-point increase then is now “very, very likely.”
The flurry of comments followed last week’s data, which showed core inflation — stripping out volatile elements such as food and energy — is now at 5.6%, the fastest pace in euro-zone history.
The ECB’s zeal to tighten further chimes with hawkish noises from the US Federal Reserve, whose decision is on March 22.
“The current information on underlying inflation pressures suggests that it will be appropriate to raise rates further beyond our March meeting,” Lane said in Dublin in a speech that focused on the mixed messages to be found in underlying inflation gauges. “Exactly what we do in May will be very data dependent.”
That acknowledgment of the need for more tightening came with a warning that officials shouldn’t be on “autopilot,” that there will be a host of reports and surveys to inform them before the May decision, and that they should assess “the impact of the cumulative tightening” already in place.
Lane also cited upcoming forecasts at next week’s decision. Centeno said colleagues should note that headline price growth has slowed compared with their December projection.
The Portuguese governor said that’s what the ECB actually targets and that officials “should not rush to conclusions” on other gauges, illustrating that how much weight to place on core inflation data is now the focus of debate — something that already revealed in minutes of February’s meeting.
By contrast, the Austrian central-bank chief emphasized that underlying measure, in remarks that forced two-year German bonds to reverse gains.
“I assume that core inflation will not weaken significantly in the first half of the year and will remain around the current level,” Holzmann told Handelsblatt. “In that case, I expect we’ll hike rates by half a percentage point four more times this year.”
That would bring the ECB deposit rate to 4.5%, a level few have yet even envisaged. Wunsch’s comments on Friday that “looking at rates of 4% would not be excluded” if underlying inflation remains elevated already marked the breaking of new ground in a week when investor bets priced in for the first time the prospect of reaching that level.
ECB Credibility
Analysts are taking note: Nomura on Monday raised its ECB forecast, predicting the rate will now reach as high as 4.25% — with 50 basis-point hikes in March, May and June, followed by a final quarter-point increase in July.
“We think the ECB will need to raise rates more (not less) in order to preserve its inflation credibility,” economists Andrzej Szczepaniak, George Buckley and George Moran wrote in a report. “The ECB will likely focus on the underlying momentum in core inflation – even if it is slowing, it looks set to remain persistent for longer than had been originally envisaged.”
There are few public events scheduled before the blackout period kicks in. On the ECB’s calendar, Lagarde and Executive Board member Fabio Panetta will speak on Wednesday. The president’s appearance is intended to mark International Women’s Day, so could conceivably steer clear of monetary policy.
–With assistance from Peter O’Dwyer, Marton Eder, Alessandro Speciale and Alice Gledhill.
(Updates with Nomura comment in penultimate paragraph)
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