The Governing Council, which is made up of the Executive Board and the heads of the national central banks, is currently seen by the majority as an assembly of “doves”, i.e. representatives of a soft monetary policy. Advocates of tough politics, on the other hand, are called “hawks”.
So far, ECB boss Christine Lagarde and ECB chief economist Philip Lane have been unperturbed by an easing on the price front. But the interpretation of a temporary inflation is also being questioned internally in the management circle of the central bank. Who counts among the hawks and who among the doves in the Council? According to experts, the Governing Council is currently sorting itself along these lines.
It can be assumed that the new head of the Bundesbank, Joachim Nagel, will, like his predecessor Jens Weidmann, insist on taking the price increase seriously and keeping options open to take stronger action than before. However, this means that only one falcon replaces another falcon. It is more important what is happening with the doves or with the central bankers classified as “neutral”.
Three Council members in particular could be important in this regard: German ECB Director Isabel Schnabel, French central bank chief François Villeroy de Galhau and Spanish central bank chief Luis de Guindos.
According to a classification by Commerzbank, Schnabel and Galhau are considered “neutral”, while de Guindos is considered “dove”. DZ Bank takes a similar view, but still classifies Villeroy de Galhau as a dove. In turn, central bank circles say that de Guindos may be wrongly classified as a dove because he comes from Spain and thus from a southern euro area country. In discussions, he sometimes takes a tighter line.
Villeroys, the flexible French
Villeroy’s voice is considered particularly important in central bank circles because he is flexible and is often one of the first to change his mind when a debate turns. As a result, it has a signaling function.
Isabel Schnabel, on the other hand, recently emphasized the risks of climate policy for price stability in a speech. Even if no short-term consequences can be derived from this, it has shifted its position more towards the hawk camp, from which such warnings have long been heard.
The decisive factor will be whether the ECB tightens its course at least verbally on Thursday. The experts have different forecasts ready. Deutsche Bank economist Mark Wall now expects the ECB’s first rate hike in December. He assumes that the central bank will announce in September that it will end its bond purchases in the third quarter of 2022 and then raise interest rates in December.
DZ Bank, on the other hand, believes that the ECB must “dampen inflation concerns” and at the same time “signal a readiness to act”; but she does not foresee any “adjustment” of monetary policy on Wednesday. Similarly, Commerzbank writes somewhat vaguely: “At Thursday’s meeting, the Governing Council of the ECB will try to find a compromise on the assessment of inflation risks and the monetary policy reaction.”
A clear demand comes from Carsten Roemheld, a capital market strategist at the fund company Fidelity International: “The ECB underestimates the short-term development and has to rethink as soon as possible. The time of the crisis and the corresponding emergency measures are over, the economy is overperforming and the job market is picking up again.”
Goldman Sachs, on the other hand, considers the underlying inflationary pressure in the euro zone to be lower than in other regions and therefore continues to see the ECB on hold. JP Morgan expects the ECB to raise interest rates for the first time in the first quarter of 2023, but three rate hikes of a quarter percentage point each in 2023 and 2024, which is a pretty tight forecast.
It was already hot in December
The Council meeting in December already showed how far apart the opinions of the ECB Council on inflation risks are. The doves, led by ECB chief economist Philip Lane, expect inflation in the euro area to drop below two percent again in the medium term.
The hawks don’t want to commit to that forecast. You are particularly critical of the fact that the ECB has signaled very clearly that it will not yet raise interest rates this year. The central bank council had decided that the bond purchases should amount to 20 billion euros per month from October, without indicating an end. Since stopping bond purchases is a prerequisite for an interest rate hike, rising interest rates are practically impossible next year.
The then Bundesbank President Jens Weidmann and his counterparts Robert Holzmann from Austria and Gaston Reinesch from Luxembourg therefore voted against the December resolution. Belgian Pierre Wunsch, who had no voting rights, also spoke out against it.
Among the Council members who supported the December decision, there were also critical voices on the inflation risks and the uncertainty of the forecasts, including Schnabel and Villeroy de Galhau. The German is a member of the six-strong ECB Executive Board, which runs the central bank’s business. It would therefore be particularly serious if she did not openly support the decision. According to the participants, at least during the debate, she is said to have clearly warned of inflationary risks.
When it comes to the positioning of the council members, the extent to which inflation is discussed in the respective home country plays an important role. Sensitivity to inflation is especially pronounced in Germany, which many attribute to the experience of hyperinflation in the 1920s.
The ECB is also viewed very critically in the Netherlands. Among other things, the fact that old-age provision is largely based on private pension funds, whose business is made more difficult by low interest rates, plays a role there. In other countries, the issue is less in the foreground and is partly blamed more on their own government.
An important question is also how high the inflation will be in each case. According to the European standard of the harmonized index of consumer prices (HICP) in December, for which the last comparable data from all euro countries are available, it was twelve percent in Estonia. The values were also relatively high in Spain, Belgium and Germany, but comparatively low in Italy and France.
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