MNI INTERVIEW: ECB To Cut 50BP, Then Wait And See- Bini Smaghi
The ECB should start its easing campaign with a 50-basis-point reduction or make two consecutive smaller cuts, Lorenzo Bini Smaghi says.
The European Central Bank should cut its deposit rate by 50 basis points in June or by 25bp in both June and July if it wants to buy itself time over the summer without prompting immediate speculation about the timing of subsequent easing, former Executive Board member Lorenzo Bini Smaghi told MNI.
“Cutting rates by just 25bp will not change dramatically the picture and the discussion will immediately move to the timing of the next cut,” Bini Smaghi said in an interview, adding that cutting by 50bp in June would “justify a wait and see attitude for a few months before the next move.”
The ECB would have no reason not to cut in June if its new projections confirm the March forecast for inflation to fall to 2% in 2025 and below 2% in 2026 based on a yield curve incorporating a reduction in market rates over the coming months, said Bini Smaghi, now chairman of the board at Societe Generale, adding that holding rates for longer would imply tighter monetary policy as inflation falls.
Market expectations for 75bp in cuts in 2024 are probably right, he said, but he saw a lower probability of lower rates next year, and added that the ECB is likely to remain data-dependent even at the risk of falling behind the curve on easing. (See MNI SOURCES: ECB Cut Expectations Range From 50-100BP In 2024)
“If the economy indeed picks up in the second half of this year and inflation stays around 2%, there may be little scope for cutting rates below 3% in 2025,” he said, adding that it would be around that level of the deposit rate that the ECB would be faced with difficult calls over the long-term neutral rate of interest.
“It may not be very useful at this stage to speculate about this issue [the neutral rate]. To be sure, in the coming months the ECB decisions will not be constrained by such a discussion,” he added.
MONETARY CONDITIONS
In setting policy, the ECB must also take into account the fact that “prudential policy has tightened in the last months” as supervisors raised capital buffers and put pressure on banks for more rigorous risk management, he said, adding that monetary conditions have tightened even as inflation expectations have decreased and long-term rates have eased from cycle highs.
But the picture could change towards the end of the year as quantitative tightening accelerates, he added.
“At that point rates may go up in order to encourage private investors to step in for the central banks and finance the public debt. The yield curve may get steeper,” he said.
Bini Smaghi said it was possible the U.S. Federal Reserve could cut rates a couple of times before the summer break and then wait for December for its next move. The upcoming U.S. elections mean the Fed has “greater dilemmas than the ECB,” he added. (See MNI SOURCES: ECB Wary Of Any "Significant Divergence" With Fed)
“If the Fed waits too much, and cuts rates just before the election, say in September, it may be accused of helping the current administration. If it doesn’t cut rates until the election, waiting for inflation to further come down, it may be accused of helping the Trump campaign,” he said, noting that given the stronger U.S. economy and higher inflation a Fed cut would put the ECB in a difficult position if it decided to hold rates.