MNI INTERVIEW: Neutral Not Key To ECB Policy - Patsalides
MNI (ROME) - The European Central Bank should not allow its policy setting to be tied to estimates of the neutral level of interest rates, Central Bank of Cyprus Governor Christodoulos Patsalides told MNI, emphasising the importance of a continued data-dependent approach.
“We need to proceed with caution and avoid moving too slowly or too quickly in our policy stance calibration and remain agile to appropriately respond to any further shocks,” Patsalides said in emailed responses to questions.
While the ECB’s deposit rate is now approaching the upper bounds of estimates of neutral, Patsalides insisted on the continued reliance on the ECB’s three reaction function criteria -- the inflation outlook based on economic and financial data, underlying inflation dynamics and the strength of monetary transmission for calibrating next policy decisions in real time.
“While our policy remains restrictive at this stage, going forward the appropriate degree of restrictiveness is continuously reassessed based on evolving economic conditions at each meeting,” Patsalides said. (See MNI SOURCES: ECB Likely To Tweak Language, Keep "Restrictive")
Basing policy decisions on a fixed range of estimates of neutral would be neither appropriate nor effective, he said.
NO FORWARD GUIDANCE
“The risk of miscalibration -whether by tightening too much or easing prematurely - is significant, particularly in the current unsure economic environment,” he said. “By evaluating economic conditions on a meeting-by-meeting basis, we aim to implement a responsive and effective monetary policy.”
Patsalides rejected the idea of returning to issuing forward guidance in the current circumstances, as it could limit the ECB’s ability to respond flexibly to unforeseen changes.
“Given the high level of uncertainty, it is crucial to maintain our prudent, data-dependent approach while preserving the necessary policy optionality both any inflation and output shocks,” he said.
An acceleration of rate cuts could be justified by a substantial acceleration in disinflation, either through a weakening of wage growth, falling energy prices, or subdued price momentum in services, he said. A significant economic slowdown, with an associated risk of a pronounced and persistent cooling of inflationary pressures could also justify swifter easing, he added.
On the other hand, if inflationary pressures build, wages increase more than expected, or geopolitical and trade tensions push up energy prices and disrupt global trade, then “pausing rate cuts or even reversing course to tighten monetary policy may be considered.”