LDN - Business

ECB's next move is a cut but policymakers spar on timing

[January 29, 2024] FRANKFURT (Reuters) -The European Central Bank's next move will be an interest rate cut but policymakers speaking on Monday spared on the exact timing of the move or the trigger for action.

The ECB kept its key rate unchanged at a record high 4% last Thursday but sounded confident that inflation was coming under control, fuelling already widespread bets in the market that policy easing could start in early spring.

All policymakers agreed that inflation trends were promising but drew different conclusions, with some making the case for earlier action while others argued for continued patience until they had further confirmation that inflation was under control.

"The next move will be a cut, and it is within our reach," ECB policymaker Peter Kazimir said in a blog post. "I am confident that the exact timing, whether in April or June, is secondary to the decision's impact.

"The latter seems more probable, but I will not jump to premature conclusions about the timing," Kazimir, Slovakia's central bank chief said.

Mario Centeno, Portugal's central bank governor, meanwhile said he preferred to act sooner rather than later because that would allow the ECB to be more gradual.

"We can react later and more strongly, or sooner and more gradually," Centeno told Reuters in an interview.

"I am completely in favour of gradualism scenarios, because we have to give economic agents time to adapt to our decisions," Centeno, a policy dove and former head of the Eurogroup finance ministers grouping, said.

Although the two views appear quite different, the gap in actual policy terms is small. Few if any expect a rate cut in March and June seems uncontroversial, so the actual debate is whether the ECB should cut in April or wait until its next meeting in June.

Given that monetary policy works with a 12- to 18-month lag, a six week deviation in the first move is likely to have a negligible impact on the real economy.

Still, investors now see 140 basis points worth of interest rate cuts this year and see a close to 100% chance of the first move coming in April.

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The building of the European Central Bank (ECB) appears on the horizon during sunset in Frankfurt, Germany, December 2, 2023. REUTERS/Wolfgang Rattay/File Photo

On the conservatives' side, Kazimir argued that cutting too soon is a greater risk because jumping the gun could derail disinflation and actually prolong the period of tight monetary policy.

Klaas Knot, the influential Dutch central bank chief, also appeared to back a more patient approach, arguing that some pieces of the inflation puzzle are not yet in place.

"We now have a credible prospect that inflation will return to 2% in 2025. The only piece that's missing is the conviction that wage growth will adapt to that lower inflation", Knot told Dutch TV on Sunday.

Centeno, meanwhile, said there is already a lot of evidence that inflation is falling sustainably and waiting for first quarter wage data due out in May was not as imperative as some policymakers argue.

"Data-dependent is not (being) wage-data dependent... we don't need to wait for May wage data to get an idea about the inflation trajectory," he said

Luis de Guindos, the ECB's Vice President, also speaking on Monday, kept a more neutral approach, arguing that a cut will come sooner or later and there was growing optimism about overall inflation and underlying price trends.

"(There is) good news regarding inflation developments and this will sooner or later be reflected in (our) monetary policy," De Guindos told Spanish radio RNE.

(Reporting by Balazs Koranyi, Sergio Goncalves, Andrei Khalip, Jesús Aguado and Emma PinedoEditing by Gareth Jones, Toby Chopra)

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