INTERVIEW: Gradual Cuts Risk Lower Terminal Rate- Bini-Smaghi
MNI (ROME) - The European Central Bank is too optimistic on economic growth and downside risks are high, former ECB executive board member Lorenzo Bini-Smaghi told MNI, adding that continuing with its gradual pace of monetary easing could eventually mean that rates end up lower than if it had moved more quickly.
“The ECB could be underestimating the strong risk of a slowdown,” Bini-Smaghi said in an interview, pointing to its projections for economic expansion of 0.7% in 2024 and 1.1% in 2025 and 1.4% in 2026.
Continuing with the ECB’s gradual easing path of cuts in 25-basis-point increments could lead to a lower terminal rate, he said, speaking after the Dec 12 meeting in which the deposit rate was reduced to 3%.
“50 [in December] would have been to cover ground. This need for being gradual is hard to understand with growth below potential,” said Bini-Smaghi, who left the ECB in 2011 and is now chairman of Societe General. (See MNI ECB WATCH: ECB Cuts 25BP, Drops Restrictive Language)
While Bini Smaghi said he has no clear view on the level of the neutral rate, which neither stimulates nor slows the economy, he sees no sense in keeping a restrictive monetary stance when growth is below 1% this year and most probably below 1.4% in 2025, which would mean the output gap is negative.
MARCH PROJECTIONS
The ECB’s March projections could see further downward revisions for growth, bringing them closer to the market view, he said.
“There will also be more information on tariffs,” he said, referring to likely policy action by U.S. President-elect Donald Trump, which he expects to reduce global trade and quickly change the outlook.
The situation for the European economy could soon be challenging, though the euro would be likely to depreciate in the face of tariffs, providing some competitive compensation, and it is hard to predict the likelihood of a recession, Bini-Smaghi said.
The ECB is likely to continue reducing its balance sheet, though its optimal level is unknown and this process has little effect on long-term rates, he said. Political turmoil such as that seen in France is unlikely to affect this process, he added, though he noted that the European Union’s new fiscal rules would make it easier for the ECB to deploy its emergency Transmission Protection Instrument to purchase bonds if necessary, because it provides a transparent framework for national debt trajectories and clear guidelines for compliance.