MNI SOURCES: ECB Wary Of Any "Significant Divergence" With Fed
The ECB won't mind if it cuts more quickly than the Fed so long as the rates gap does not become too great.
European Central Bank policymakers would be wary of permitting a “significant divergence” in interest rates with the Federal Reserve during their widely-expected easing cycles, sources told MNI.
Governing Council members see their June 6 meeting as the most likely occasion for a first cycle cut, which market pricing now suggests would come a week before a similar move by the Fed. While ECB officials dismiss any suggestion that their decisions should be swayed by deliberations in Washington, they accept the reality of the enormous influence of the U.S. central bank within the global financial system, with all of its implications for capital flows and exchange rates as well as for eurozone inflation.
Several officials noted that a “significant divergence” from Fed policy would be unwelcome to the ECB, though they were reluctant to quantify what this might be.
“If the Fed cut 50 and we cut 75, even 100 basis points in a cycle, there isn’t any great concern. However, beyond that and dependent upon the messaging either side of the Atlantic, it may become more problematic,” one source said. (See MNI SOURCES: ECB Cut Expectations Range From 50-100BP In 2024)
There was no “exact metric,” another senior national central bank official said, adding “but you’ll know it when you see it.”
Officials in Frankfurt have closely followed the shifting expectations for the timing of Fed easing, as U.S. inflation has proved hard to tame. Market bets on a June cut by the FOMC firmed after Wednesday’s meeting, with pricing implying an 80% probability of a reduction.
Still, any suggestion of waiting to cut before the Fed moves first would be very much a minority position within the Governing Council, according to another national central bank. Austria’s central bank chief Robert Holzmann told MNI earlier in February that the ECB might risk a negative market reaction if it cuts first. (See MNI INTERVIEW: June Cut Not Done Deal - ECB's Holzmann)
NOT DEPENDENT ON FED
Sources stressed that the eurozone was not dependent on Fed policy outcomes.
“We are a 500-million-person currency bloc with a single market. We must set our monetary policy independently of whether or not the Fed moves,” one source said, noting that the ECB set its own course at the start of the hiking cycle, kicking off around eight months after the Fed.
However, the source acknowledged that Fed decisions and their effect on the euro and growth and inflation expectations would figure in policy discussions.
“If the Fed easing cycle is slower than ours and the euro weakens sharply, we will have to pay careful attention to how that weighs on import prices and its impact on wider price levels,” he said, although he observed that a weaker currency would be positive for exports.
An ECB spokesperson declined to comment. President Christine Lagarde stressed the ECB’s independence when asked about the implications for policy of Fed rates changes at the March 7 press conference.
“Obviously we are mindful of the international environment in which we operate. But if the conditions are satisfied, if our diagnosis is that we have been restrictive for long enough to be sufficiently confident that we will reach our 2% target, we will make our decision,” Lagarde said.