ECB’s Cipollone Urges Caution on Rate Hikes Until New Economic Data Arrives

European Central Bank board member Piero Cipollone has advised his colleagues to postpone any further interest rate increases until the institution’s updated economic projections become available, according to sources familiar with the discussions. The recommendation signals a growing divide within the ECB’s Governing Council over the pace of monetary tightening as the eurozone economy shows signs of cooling.

Internal Debate Over Rate Path Intensifies

Cipollone’s position, shared during recent internal meetings, reflects a cautious approach at a time when inflation, while still above the ECB’s 2% target, has been trending downward. The next set of macroeconomic projections is scheduled for release in December, and Cipollone argued that acting before these forecasts could risk overshooting on tightening, potentially harming economic growth.

His stance places him among the more dovish members of the Governing Council, who are increasingly concerned about the lagged effects of previous rate hikes. Since July 2022, the ECB has raised its key deposit rate from -0.5% to 4%, the fastest tightening cycle in the bank’s history.

Economic Data Points to Slowing Momentum

Recent indicators suggest the eurozone economy is losing steam. Manufacturing output has contracted for several months, and services activity is also softening. Germany, the bloc’s largest economy, narrowly avoided a recession in the third quarter but faces persistent industrial weakness.

Inflation, meanwhile, fell to 2.9% in October, down from a peak of 10.6% in October 2022. Core inflation, which excludes volatile energy and food prices, also eased but remains sticky at 4.2%. These mixed signals have complicated the ECB’s decision-making, as some policymakers worry about entrenched inflation while others emphasize the risk of a prolonged downturn.

What Cipollone’s Call Means for Markets

Financial markets have already priced in a high probability that the ECB will hold rates steady at its next meeting in December. Cipollone’s public urging reinforces that expectation. Investors are now closely watching for any shift in forward guidance from ECB President Christine Lagarde and other key officials.

If the ECB pauses as Cipollone suggests, it would align the central bank with the Federal Reserve, which has held rates steady since July. However, the ECB faces a unique challenge: the eurozone economy is more sensitive to rate changes than the U.S. economy, given its heavier reliance on bank lending and weaker fiscal support.

Conclusion

Cipollone’s call for patience underscores the delicate balancing act the ECB must perform. With new economic projections due in weeks, the Governing Council has a narrow window to decide whether to hold firm or tighten further. The outcome will have significant implications for borrowing costs, business investment, and household spending across the 20-nation currency bloc.

FAQs

Q1: Why does Cipollone want to pause rate hikes?
He believes the ECB should wait for updated economic projections before deciding on further increases, to avoid overtightening amid signs of economic slowdown.

Q2: When will the ECB release its new economic projections?
The next set of macroeconomic forecasts is expected in December 2024, ahead of the Governing Council’s final meeting of the year.

Q3: How have markets reacted to the possibility of a pause?
European bond yields have eased slightly, and the euro weakened modestly, as traders adjust expectations for a December hold. Rate-sensitive sectors like real estate and utilities have seen modest gains.