MNI INTERVIEW: ECB Could Cut In April Or June- Simkus

The European Central Bank could cut rates in April or June, but uncertainty is too great for clear forward guidance and more confirmation is needed of a sustainable decline in inflation before deciding on the timing and the pace of subsequent easing, Bank of Lithuania Governor Gediminas Simkus told MNI.

Most of the impact of ECB tightening so far has already been transmitted to the economy, with “the time for rate cuts approaching," Simkus said in an interview. But, while December’s inflation data came in slightly better than projected, January’s were slightly worse, he added, noting that market bets for about 120-125 basis points of cuts this year appeared to be higher than officials' expectations.

“At this particular juncture, if you start considering whether a decision will be made in April or June, it’s not possible to be that exact. This divergence comes from a vantage point from which we are not yet able to see. You need to decide exactly what's needed at that particular time,” he said.

Asked how the ECB might signal its readiness to lower the deposit rate, currently at 4.00%, for the first time since September 2019, Simkus replied: “In times of uncertainty, forward guidance is not helpful. That would be my answer.”

HUGE UNCERTAINTY

It is futile to speculate as to the size of eventual rate cuts, Simkus said, pointing to “huge” levels of uncertainty and adding that there was no “magic” indicator that can be relied upon to guide the course of monetary policy.

“Even with all the data we have it’s still about uncertainty and probabilities. That’s why we have to take the holistic view. The important thing is to consider the uncertainty and the evolution of this uncertainty from the decision-makers’ perspective.”

While headline inflation could hit 2% this year, it is unlikely to stay there sustainably without monetary policy being sufficiently restrictive if core inflation remains above 2%, Simkus said. (See MNI INTERVIEW: Beware Temporary Inflation Dip- ECB's Kazaks)

“First, underlying inflationary pressures are still quite strong. Second, the labour market -- very active; low unemployment; high wage growth. And in the euro area most of the wage bargaining is happening now, or in the past quarter, so we will see what the results are going to be. Thirdly, geopolitical risks: they are complex but, in the current context, may create inflationary pressures either through energy markets or other supply disruptions.”

Still, Simkus said, tightening has now been transmitted to the most rate-sensitive sectors of the economy via lending rates for households and companies.

“I believe we have seen most of the impact on economic activity, because it comes with lags, and then it comes with slightly longer lags onto inflation,” he said, adding that Europe’s economy will also return to growth, as improvements in real wages make a progressively greater contribution to expanding private consumption.