„I don't think there's a high risk of the ECB cutting interest rates too late“
Mr. Wieland, what message do you see in the most recent interest rate decision by the European Central Bank (ECB)?
The ECB is not yet ready to cut interest rates. There is much to suggest that an interest rate easing could be on the agenda in June. Many observers were already expecting this, but the likelihood of it happening has now increased. An interest rate cut as early as April has become less likely.
Why is that?
One indication of this is that Lagarde has emphasized that significantly more data – on wage trends, for example – will not be available until June. Waiting for this data is understandable.
The ECB has lowered its inflation forecast for 2024 from 2.7% to 2.3%. Do you see this as a signal that the scope for an early interest rate cut has increased?
First of all, it is good to see that inflation is continuing to fall and is also likely to decline in the coming months. However, I think it is more important to look at the core rate. Here, the decline in the forecast from 2.7% to 2.6% is much smaller. Domestic inflation also shows how persistent inflation still is.
Lagarde also explicitly mentioned high domestic inflation, which excludes import prices, at the press conference following the interest rate decision.
I very much welcome that. The ECB should take a closer look at this.
Ultimately, it is also domestic inflation that the ECB can influence with its monetary policy. It has little influence on the price development of imported goods.
I wouldn't say that. Monetary policy has an impact on exchange rates, which in turn influences import prices.
You point out that inflationary pressure is still high. Does that mean that you consider the risk of the ECB cutting interest rates too late to be low?
The risk is there. However, I don't actually think it's great. Because monetary policy is not particularly restrictive at the moment. Market interest rates are just under 4%. Real interest rates in the eurozone are therefore low. The core rate is not even 1 percentage point lower, the total rate less than 1.5 percentage points. Interest rates in the USA are higher, with a similar inflation rate.
However, the economy in the eurozone is performing worse than in the USA.
Nevertheless, the risk of the ECB's monetary policy leading to a recession in the eurozone is low. There could be a recession in Germany in 2024, but we have also done a lot to ensure that the economy performs poorly here. That is not the ECB's fault.
Are you talking about failed German economic policy?
Yes, bureaucracy is increasing and the tax burden on companies is too high. There is a lack of supply-oriented policies that significantly improve competitiveness. It was also a mistake to shut down nuclear energy without having sufficient alternatives. Energy-intensive production has fallen sharply due to high gas and electricity prices. One of the few competitive advantages that Germany still has is that interest rates are relatively low. Government bonds carry low interest rates due to the relatively low level of debt in Germany. The country's high credit rating also means that companies in Germany can borrow capital relatively cheaply compared to other countries.
Let's return to the subject of interest rate cuts. If the ECB does indeed cut interest rates in June as generally expected, it might possibly ease before the Fed. Do you think it is realistic for the ECB to take the first step in the interest rate turnaround?
The Fed could well cut interest rates before the ECB. In the past, it has often been the case that the Fed has decided to change the direction of monetary policy first. But just because this is the rule does not mean that there can be no exceptions.
Lagarde also emphasized after the interest rate decision that the ECB does not make its monetary policy dependent on the Fed's decisions. So you think this statement is credible?
Yes, if the ECB comes to the conclusion that it is time for an interest rate cut based on its data, then it will decide to do so, regardless of whether the Fed has already cut its key interest rates by then or not.
The ECB is tight-lipped on what the further course will be after the first interest rate cut. Even then, it will decide depending on the data. Would you like more guidance?
I think it's right that the ECB has abandoned forward guidance. Determining exactly what monetary policy will look like in the coming months was one of the reasons why the ECB raised interest rates too late in 2022. It had practically bricked itself in with its announcements. That's why I think it's right – and actually quite logical – that it is now emphasizing its dependence on data and leaving all options open.
Lagarde has announced that the ECB will present its revised monetary policy framework within the next week. What do you expect?
It will probably not return to the framework from before the financial crisis. But it would be desirable if it were to significantly reduce its balance sheet and bond portfolio.
Do you think a higher minimum reserve for banks makes sense?
The key point here is that they do not earn interest. I think the argument that the banks are earning a lot from the interest rate turnaround, while the central banks are now incurring high losses, is too short-sighted. Europe's commercial banks are not particularly profitable by international standards. A sharp increase in minimum reserves can be seen as a tax on the banks. This would further reduce profitability. In terms of financial stability, I don't think that makes sense. The fact that there have been no major bank failures in the eurozone following the bankruptcy of some US regional banks may also be due to the ECB's relatively generous policy towards banks.
In recent days, the question of whether the ECB should take sustainability into account in its monetary policy has also come up again. What is your view on this?
The ECB has control over its own greenhouse gas emissions and can ask itself where it makes sense to cut back. However, I consider its influence on the emissions of the eurozone to be very small. The instruments of the CO2 tax and emissions trading are much more effective here than the ECB's bond-buying policy, for example.
