ECB Governing Council member Yannis Stournara, a known dove, proposed two rate reductions “before the summer break” and a total of four throughout the year. This strategy, he argues, is essential to ensure that ECB’s monetary policy “does not become too restrictive” in the face of current economic challenges.

In an interview, Stournaras emphasizes the urgency of beginning these rate cuts soon, but not in April, as there will be “only little new information” available before then.

The rationale behind Stournaras’s push for rate cuts stems from his observations on Eurozone’s economy is “much weaker than expected,” with risks skewed to the downside. Meanwhile, inflation, although significantly reduced, presents a balanced risk profile.

Addressing concerns about risk of “wage-price spiral,” Stournaras argued that wages are merely “catching up, not leading inflation.” He also highlights the moderating trend in nominal wage growth and the capacity of profits to absorb part of the pay increases, suggesting that fears of a wage-driven inflationary loop may be overstated.

Looking ahead, Stournaras envisions the deposit rate gradually decreasing to 2% by the end of 2025 or the beginning of 2026. However, he draws a line at this level, suggesting that rates should not fall below the pre-pandemic levels of 2%.

Account of the ECB monetary policy meeting in June showed there was “broad agreement” that “update of the monetary policy stance was called for”, due to “prolongation of uncertainties” and the implications for inflation outlook. And inflation was still projected to reach “only 1.6%” in 2021, which was seen to remain “some distance away” from the 2% target. Thus, it’s considered “important” to “demonstration” ECB’s “determination to act”.

Also, there was “broad agreement” on adjusting the calendar based component of the forward guidance to keeping rates at present levels “at least through the first half of 2020”; reiterating the guidance on reinvestment; and thirdly, to set interest rate of TTRO II equal to average MRO rate plus 10bps.

Full accounts here.

ECB Governing Council member Francois Villeroy de Galhau said it’s still too early to decide whether the central bank should hike by 50bps or 75bps at October 27 meeting. But he noted interest rate should be at neutral level, or “a bit less than 2%” by year end.

Then, ECB could start shrinking its balance sheet. “It would not be consistent to keep a very large balance sheet for too long in order to compress the term premium, whilst at the same time contemplating tightening policy rates above neutral,” he added.

“The reimbursement of TLTROs comes first, and we should avoid any unintended incentives to delay repayments by banks,” he said. “Here we could start earlier than 2024, maintaining partial reinvestments but at a gradually reduced pace.”