Reference by Huw Pill, Bank of England chief economist, to a ‘table mountain’ scenario for a UK rate plateau – since backed by Andrew Bailey, BoE governor – may act as a useful guidepost for ECB deliberations. A sophisticated way of telling markets what may happen next will be to say interest rates can be cut only after the ECB advances further in reducing government securities holdings – a key additional trade-off. Keeping interest rates unchanged can be accompanied by further measures governing Eurosystem portfolios of different categories of government bonds. After smooth summer repayment of bank refinancing operations, excess bank reserves have fallen from €5tn to €3.6tn. The ECB and shareholder central banks are lowering the Eurosystem balance sheet that has been bloated by eight years of quantitative easing.

The Bundesbank sees greater reliance on minimum reserves as a ‘modern’ instrument – another important trade-off in the policy balance. That would return the percentage to the 2011 level.

Spurred by the Bundesbank, the council is deliberating on whether the level of required bank reserves – non-interest-bearing following the council’s 27 July decision to lower minimum reserves remuneration to zero – should be raised from 1% to 2% of liabilities. Zero-remunerated minimum reserves playing stronger role.A difficult – but not impossible – communication task. This could even foreshadow rises later if inflation proves unexpectedly stubborn. Lagarde would have to persuade the public and financial markets that maintaining a 3.75% level does not signify imminent rate reductions. Increasingly subtle governing council decision-making should allow the ECB’s ‘pro-tightening’ faction powerful compensation in return for keeping rates on hold. ECB attempting to master trade-off despite challenges.But hawkish decisions, with the normal lag of up to 18 months, are reverberating throughout Europe. The central bank started late, reflecting 2021 complacency about ‘transient’ inflation. Weakening economies – particularly three consecutive months of falling industrial production in Germany – and slackening credit activity underline how ECB tightening is working through to the real economy. Updated projections are expected to show probabilities hardening that inflation will be 2% by 2025. Latest figures showing the euro area’s headline and core inflation gradually decelerating to 5.3% in August – although still well off the 2% target – provide just enough evidence to justify ‘no rise’. Inflation starting to come under controlĮCB officials have been fervently stating that interest rate decisions will be ‘data dependent’.Should the 27 July rise in the key deposit rate to 3.75% be the last in the series? Or should there be one last push to 4%? Here are 10 reasons why a halt in the rate-tightening cycle makes sense. If they operate adroitly, there are acceptable possibilities for delicate compromises. This gives different forms of bargaining advantage to the diverse sections of the council. As it stands, opinion is divided on the 26-person ECB council.Ĭhristine Lagarde, ECB president, and other council members wish to maintain harmony over the ECB’s next step as a crucial way of safeguarding its credibility. Its decision on 14 September on whether to raise interest rates one more time in its 14-month tightening cycle is one of the most thorny in the ECB’s 25-year history. The European Central Bank is learning the art of the trade-off.

10 om strategy decisions