MNI INTERVIEW: ECB Inflation Sceptics Hold Upper Hand-Scicluna

A majority of the European Central Bank’s Governing Council remains sceptical that inflation has been shown to come down quickly enough to justify easing policy yet, Central Bank of Malta Governor Edward Scicluna told MNI, though he played down reports the ECB could wait until June before lowering rates and called instead for a cut to be considered by as soon as next month.

Reducing the deposit rate in March could reverse the effect of last September’s 25-basis-point hike without the ECB having to provide a clear signal as to future cuts, Scicluna said in an interview.

“My point is that there is not harm in undoing that as a starter because you don’t need it [last hike] without commitment of what are you going to do next,” he said, adding he was not alone in this thinking and that a minority on the Governing Council could argue for such a position.

However, Scicluna noted that those on the Council who are sceptical “inflation is coming down or will come down towards the target have the upper hand. In other words, they are more”. (See MNI INTERVIEW: Beware Temporary Inflation Dip- ECB's Kazaks)

MARCH PROJECTIONS

Still, there is a consensus on the Council that March’s projection for inflation in 2025 “will reach towards target” slightly above or below 2%, he said, adding that the ECB should address undershoots of the 2% target with equal urgency as it does overshoots.

“If our projections show that inflation will be coming below 2%, when the demand is falling there is a danger that we undershoot, the risk is there,” he said.

Uncertainty means that the ECB should maintain its data-driven approach rather than adopt clearer forward guidance, he said, adding that it was also difficult to estimate how much rates would be cut in 2024. (See MNI SOURCES: ECB Cut Expectations Range From 50-100BP In 2024)

Talk of there being no first rate until June was only a “media” report, he said.

“We haven’t reached a point on agreeing on a package of cuts. We will see how convincing the March data is, but I don’t exclude somebody who makes a point on that,” he said, stressing “we haven’t had the discussion” about whether to wait until June.

Asked whether it would be better to reduce rates in increments of 25 or 50 basis points, Scicluna said: “the earlier you are, the more soft you will go and the later you are, and maybe for some behind the curve, then you need to make it up. If we find we are behind the curve, it will be a bigger cut.” (See MNI INTERVIEW: ECB Could Cut In April Or June- Simkus)

NO WAGES-PRICES SPIRAL

Wages settlements have provided no signal of a wages-prices spiral, he said. While Scicluna does not think it will be necessary to wait until more complete wages data is available in May before deciding on the ECB’s next move, he accepted that other officials might disagree.

“If you want to wait, wait, but if you want to make money you invest. This is how people make money. Then it is too late,” he said, using a trading analogy to argue for prompt monetary policy action.

The eurozone is currently “a dual economy where the services sector has gone one way and manufacturing, exports in another,” as a result of post-pandemic dynamics still to be properly understood, he said.

Asked about discussions on overhauling the ECB’s Operational Framework, Scicluna said that that there was still no agreed data for them to conclude, and that it was better not to rush.