MNI SOURCES: ECB Closer To Dropping "Restrictive" Language

MNI (LONDON) - The European Central Bank is moving towards dropping its reference to keeping rates “sufficiently restrictive” until it achieves its inflation target but while some members advocate for a change as early as the December meeting, other Eurosystem sources told MNI next month might still be too early.

Policymakers are debating whether to fully remove the phrase or modify the language to reflect the transition to a more neutral monetary policy stance. “It could be removed, or it could be tweaked to something like ‘policy easing will continue as we get closer to a neutral rate,'” one official said, noting that the timing remains uncertain. Others expect the change to occur in December, with one source saying it is practically a "done deal."

More dovish members argue that adjusting the language next month is essential to acknowledging that the ECB has entered a new phase in which disinflationary trends and the policy trajectory are clearer. Bank of Italy Governor Fabio Panetta has called for rates to reach neutral—or even expansionary—levels, while advocating for the ECB to drop its meeting-by-meeting approach in favour of more forward-looking communication.

But the centre of gravity within the Governing Council remains cautious, with members continuing to discuss the appropriate stance. “I would not say anything about ‘restrictiveness’ if I were them … why affirm something about r minus r* if we are really not sure about it,” another source said, using abbreviations for the real interest rate minus the neutral rate. (See MNI INTERVIEW: ECB Looks At "Restrictive" Language - Holzmann)

TRAJECTORY IS CLEAR

Other sources were sceptical that any change to the language was near, though the ECB’s trajectory is clear as it continues to decide cuts on a data-dependent, meeting-by-meeting basis in a process which doves say could lead to a cycle low of 2% or 2.25%.

“The language will obviously change at some point as we get closer to neutral. I'm not sure we are quite there yet,” one said.

Markets are currently pricing in a large likelihood of a 25-basis-point cut at the Dec 12 meeting, taking the deposit rate to 3%, but weak purchasing managers’ index data led the implied probability of a 50bp cut to rise to around 30%. (See MNI SOURCES: ECB Heads For 25BP Cut; Risks From Trump, Germany)

Still, it would take unexpectedly very weak headline inflation data to put a 50bp cut into serious contention for December, said one official, adding that his national central bank expected inflation of 2.3-2.4% for November.

“So, 2.3 or 2.4 and 50 will be mentioned by someone, 2.2 or 2.1, it'll be discussed, if only briefly. 2% or lower and it'll be firmly on the table,” he said.

While reference to maintaining rates at “sufficiently restrictive” levels is likely to be modified at some point in the next few meetings, it could be modified gradually, rather than in one step, the official said.

TRUMP EFFECT

The potential impact of U.S. President-elect Donald Trump’s policies could also feed into the debate. Some Governing Council members suggest his policies may lower the neutral rate, while others argue they could deliver a structural hit to growth that monetary policy should not accommodate.

National central banks are factoring in some of Trump’s anticipated impact on growth in December’s economic projections, though caution remains. “It is a very careful exercise because of the lack of policy concretisation,” a source at a national central bank said.

In the short term, the threat to the economy could stem from worsening global trade and confidence, though any monetary policy response will depend on eurozone data and the ECB's projections, another source emphasised.

“I can obviously see the longer-term inflationary risks from tariffs. A weaker currency will obviously have to be factored in. But don't just look at it against the dollar. It has to be on a trade-weighted basis, and there the currency remains remarkably stable,” the source added.

An ECB spokesperson declined to comment.