„I don't think the ECB is on the home straight“
Mr de la Rubia, some of the ECB's Governing Council members were open to an interest rate cut of 50 basis points on 12 December. Was it the right thing for the central bank to ultimately decide against it?
In normal times, I would have been in favour of a rate cut of 50 basis points in view of the weak economic growth. After all, low economic growth means less inflationary pressure. But we are not living in normal times. There are a number of structural factors, which is why I assume that inflation will remain high despite the poor performance of the economy. It is therefore not easy to argue about right or wrong. I would say that the ECB has acted correctly, in light of its clear price stability mandate, and its clear inflation target of 2%. Whether these mandates are right in this form is another matter.
What do you criticise about the inflation target?
The ECB defines its price stability mandate with a medium-term inflation rate of 2%. It would be better to make it more flexible. I am thinking, for example, of a range of 1% to 3%. Then the ECB could also ease more in the current phase, which would be important for the economy. However, the inflation target stands in the way of this. And I have not yet seen any study that has explained why inflation should necessarily be pretty much exactly 2%.
The ECB's communication does not indicate that a change in the inflation target is currently an issue.
The ECB is due to review its strategy in 2025. Do you expect the inflation target to be adjusted there?
It would be desirable for the ECB to have more flexibility in its monetary policy. However, I do not anticipate such fundamental adjustments in the strategy review. The ECB's communication does not indicate that a change in the inflation target is currently an issue.
You just mentioned structural factors that are fuelling inflation. What do you mean by that?
Demographic change, and the resulting shortage of skilled labour, mean that wage growth is high, even though we have already experienced two years without economic growth in Germany, for example. Climate change will also increase inflationary pressure. We also have increasing protectionism, and not just because of Donald Trump's election victory in the US.
ECB President Christine Lagarde has emphasised the central bank's increasing confidence that inflation will stabilise at 2% in 2025. You appear to be less optimistic.
The ECB sees itself on the home straight, but I don't think that's actually the case. Based on the structural factors mentioned, I expect inflation to average 2.6% next year, and it could even rise towards 3% in 2026.
I expect two interest rate cuts of 25 basis points in the first quarter and then a longer interest rate pause.
According to your assessment, there should therefore be significantly fewer interest rate cuts than the financial markets are pricing in, right?
I expect two interest rate cuts of 25 basis points in the first quarter, and then a longer interest rate pause. The deposit rate would then be 2.5% at the end of 2025, around 100 basis points higher than what is currently priced in on the financial markets. In 2026, I also believe an interest rate hike by the ECB is possible.
So you think that an interest rate cut by the European Central Bank of 50 basis points in January, which some investors on the financial markets are speculating on, is out of the question?
Although Lagarde showed confidence at the meeting that the inflation target will be achieved, she also remained cautious and repeatedly emphasised that the ECB remains data-dependent. I therefore assume that they will remain cautious in January. For the year as a whole, I believe that more interest rate hikes are only realistic if growth in 2025 is significantly lower than the 1.1% that the ECB and we expect. If growth is 0.5% or lower, for example, then I believe that further interest rate cuts are quite possible. This is because the weak economic growth would then have such a strong impact on inflation that it would not exceed the ECB's target of 2% despite the structural factors.
The ECB is currently talking a lot about the neutral interest rate. Where do you place it and what do you think of the debate?
I have not done my own research on where the neutral interest rate is in the eurozone. Nor do I think it is helpful for steering short-term monetary policy. If only because it is not static. Monetary policy can perhaps have a neutral effect at one moment, then for some reason there is a major, sustained surge in demand from abroad and the key interest rate no longer has a neutral effect. However, the discussion about the neutral interest rate is interesting because you can see how dovish or hawkish someone is based on the estimates of the individual Council members.
I see no reason to use TPI
Another topic that is currently the subject of much discussion, at least outside the ECB, in view of the political crisis in France, is the possible use of the TPI instrument. This would allow the ECB to buy French government bonds and thus prevent a widening of spreads to German government bonds, for example. Do you expect the ECB to activate TPI?
I see no reason to use TPI. France's access to the capital market is not jeopardised. Spreads are high by historical standards, but not so high that we need to worry about the sustainability of debt in France. The situation in France is also different to other European countries that have experienced a crisis in the past. Although France is facing politically uncertain times, it does not have a pronounced growth problem. The country is popular with foreign investors and is not badly positioned when it comes to AI, for example.
Let's assume that France's access to the capital market was jeopardised by the political crisis. Could the ECB then even justify the use of TPI? After all, the instrument is intended to be used in the event of „unjustified“ market developments that jeopardise the uniform transmission of monetary policy.
That is an intriguing point. On the one hand, should it come to such a situation, one could say that France itself is to blame for the situation, and that TPI is not intended for such a situation. On the other hand, there wouldn't really be a specific culprit because the situation, it seems, arose due to the mutual blockade in France. If the ECB sees France's access to the capital market jeopardised, I suspect that it will then use TPI to avoid a financial crisis. However, it would be interesting to see how the ECB would justify its use. But as I said, I don't expect France to get into this situation.
The interview was conducted by Martin Pirkl.
