ECB hawks push back on early rate cut bets

Frankfurt/Vienna — The European Central Bank should avoid cutting interest rates too early as inflation remains high and the hit to growth is still relatively benign, key conservatives argued on Friday, just as markets continued to bring forward their rate cut bets.

Investors now price 100 basis points of rate cuts for next year with the first one coming possibly as soon as April, a big shift compared with late October, when the first cut was projected only in July.

“It would be unwise to start cutting interest rates too soon,” Bundesbank president Joachim Nagel said in a speech. “We must not loosen policy until we are absolutely certain of returning to price stability on a lasting basis.”

Austria’s Robert Holzmann was even more explicit, arguing that the second quarter was simply too soon for a rate cut.

“We are trying to communicate (to the markets): please do not believe that this is the end of the story (on whether rate hikes are finished),” Holzmann told reporters at a briefing.

Asked if he ruled out an interest-rate cut in the second quarter of next year, he said: “That would be a bit early.”

The ECB held rates unchanged in October, snapping a streak to ten straight rate hikes, fuelling market bets that its record-breaking tightening streak is now over and the next move is a cut.

Poor economic growth readings in the past several weeks only reinforced these bets as the bloc is now increasingly likely to be in a mild and probably short recession.

But Belgian central bank chief Pierre Wunsch argued that high inflation has persisted for so long, that there was a high risk of erring in not being persistent enough.

“We have had inflation above our target for a while so the risks are becoming sort of asymmetric in terms of policy mistake,” Wunsch told a conference. “So, I think what we want… to be comfortable that we are going to 2% before we start cutting.”

Wunsch said this could mean the ECB is then too late cutting rates but this is not a “big issue” because the bank can correct its course quickly and the social cost is not excessive since the labour market remains tight and employment is high.

Instead of easing policy, the ECB should tighten further, Wunsch argued, by ending early its bond purchases in the €1.7-trillion Pandemic Emergency Purchase Programme.

Reinvestments in the scheme are due to run until the end of 2024 but Wunsch said he is pleading with colleagues to revisit this date because bond buys going for that long were unnecessary.

Responding to critics that the ECB has already overtightened, Nagel said there was no evidence for this.

“Dampening aggregate demand does not necessarily mean inducing a recession,” Nagel said. “I am optimistic that we can avoid a hard landing of the economy.”

Reuters