MNI INTERVIEW (RPT):ECB Scicluna: Little Support For 50BP Hike

(Repeats article first published on June 1)

The European Central Bank should quickly push key interest rates into positive territory but there is probably no broad support within the Governing Council for a 50-basis-point hike in July, the governor of the Central Bank of Malta told MNI.

The ECB cannot directly influence soaring energy, food or fertiliser costs, Edward Scicluna said in an interview on May 30, but it should stop purchases under its Asset Purchase Programme at the earliest possible opportunity before beginning to raise rates.

“We still have to take cognisance of the fact that we’ve been injecting liquidity into the financial system month after month after month. So at least for a starter just let off your foot from the accelerator and stop those purchases,” he said.“It's beyond question that APP needs to be stopped as early as one can, and that one should not be in negative territory at this point in time.”

The ECB’s decision to normalise monetary policy only gradually has so far been justified by the need to remain flexible given the uncertainty generated by the Covid-19 pandemic and then by war in Ukraine, Scicluna said. But the central bank must still respond to inflation. (See MNI SOURCES1: ECB Seen Making Two To Three 25-BP Hikes In 2022)

“Gradualism comes from uncertainty, and in the face of uncertainty, you need to be flexible, you need the maximum degree of freedom. However, when you’re dilly-dallying there are costs,” he said. “Gradualism can only be done from the comfort of uncertainty, and if you can afford to delay. But there comes a point when the costs of not doing or doing nothing are too high.”

INSUFFICIENT FORCE FOR 50 BASIS POINTS

But even average euro area inflation now standing at 8.1% and new Eurosystem staff macroeconomic growth and inflation projections expected to confirm continued upward price pressures may be insufficient to push the ECB into increasing rates by 50 basis points in July, he said.

“I don’t think there would be general support for a 50-basis-point hike, but it will be interesting to see when we discuss that based on the new projections,” he said, “I don’t think we’re going to get any surprises."

Recent interventions by ECB President Christine Lagarde and chief economist Philip Lane, who argued for raising rates in 25-basis-point increments in July and September, do not amount to a decision on the future rate path, he added, with Council members still to agree on when and by how much to hike.

Governing Council members arguing in favour of cautious rate hikes are more fearful that some eurozone members’ bond yields will rise sharply, causing a fragmentation of monetary policy, Scicluna said, although he was hopeful a spread blowout will be avoided. The ECB has also said it could use its Pandemic Emergency Purchase Programme to counter fragmentation.

“The spreads of the past were very much tied to political and fiscal issues in particular countries,” Scicluna said. “But to say that raising rates now would increase the cost and make it unsustainable, I wouldn't say that is the case. Secondly, we've learned that if needed we have and can use instruments like we did with the pandemic, with PEPP, although we have not discussed this at length.”