MNI SOURCES: ECB Likely To Tweak Language, Keep "Restrictive"
MNI (LONDON) - The European Central Bank is likely to adjust its reference to policy restrictiveness in its next statement in March, but there would be resistance on the Governing Council to completely removing it, as estimates of the neutral rate edge downwards but remain uncertain, Eurosystem sources told MNI.
With the ECB on course to cut by another 25 basis points on March 6, the deposit rate would reach 2.5%, which has been the top of the Bank’s range of estimates of neutral. Some more hawkish central bankers argue that this means it would no longer be accurate to keep phrasing such as “monetary policy remains restrictive.”
But, as fears build that trade tariffs imposed by U.S. President Donald Trump could deliver a further hit to already-weak eurozone growth, many on the Governing Council will argue in favour of keeping the restrictive language. Any escalating trade war could also fuel two-way price risks on both sides of the Atlantic, further complicating policy calculations at a meeting which will see a release of fresh economic projections. (See MNI INTERVIEW: ECB Agrees On Gradual Cuts To Neutral - Centeno)
“There is likely to be a further change of language in March, but I don't think we will totally remove the restrictive reference because it would imply certainty that we are no longer in restrictive and that we are sure that we are at neutral territory,” one official said. “From the range that considers neutral to go from 2 to 2.5%, as some believe, implies a range. So you have to be very brave to be sure that the upper part of the range is no longer restrictive.”
NEUTRAL REVISION
Arguments in favour of retaining restrictive are set to be underlined by a likely revision to the ECB’s estimates of neutral, to be released on Friday, which downgrades the range to 1.75% to 2.25%.
Another official agreed that “restrictive” was likely to stay for the moment.
“The consensus remains that neutral is in the 2 to 2.25 range, perhaps the median closer to 2. So I don't think you can fully remove restrictive from the equation,” the source said. “However, once you are within the, let’s say margin of error of one cut from neutral, I guess we will look at tweaking the language. But I think language will at least still be pointing to a degree of restrictiveness in policy.”
Another official emphasised that the ECB will only drop the restrictive label once it is certain rates are neutral.
“March, if we change, will likely be another staging post in language to say something like, ‘we must now monitor carefully how restrictive policy remains,’” the source said.
HAWKISH ARGUMENT
With the ECB expecting inflation to return to the 2% target in the course of this year, hawks are concerned that neutral is now close or may even have been reached. Executive Board member Isabel Schnabel called for a change to the restrictive language at the January meeting, “but got no support,” one official said.
Schnabel, who sees neutral at possibly 2.75%, is not alone in her concerns. An official from a national central bank said that the upcoming 25bp cut would be an appropriate trigger for changing the ECB’s language.
“I wouldn't be totally surprised if there's another 25bp reduction. Whether this happens in March or in April, I don't know. I personally wouldn't be surprised if this happens in March. Either way, it wouldn’t then be appropriate to describe conditions as restrictive given a neutral rate of 2.3-2.4%,” the source said.
The real policy question will be whether the ECB should enter accommodative territory, but this is still too early to determine, one source said.
“What will determine our rate path is the economy. We are still not seeing this recovery even if there are more positive signs,” pointing to an “absolutely gloomy situation” in Germany, as well as stagnation in Italy. (See MNI SOURCES: ECB Cuts Consensus, But Trump, Fiscal Risks Ahead)
“The main concern for me is Trump. At the moment he is difficult to include in the March forecast,” the source went on. “We are starting to have models and ways of understanding the economic impact of some tariffs, but we are not going to show them without justification, if Trump has not been more specific.”
Inflation risks look balanced, the official said, adding that March’s projections will be crucial.”
“The easy period of setting the policy path is very likely to finish here,” the source said.
An ECB spokesperson declined to comment.