Market Analysis

ECB could become overly restrictive, according to Cipollone

Amos Simanungkalit · 04 Sep23.1K Views

European Central Bank (ECB) board member Piero Cipollone has indicated that the ECB could continue cutting interest rates due to the ongoing slowdown in inflation, but also warned of the risk of maintaining overly tight monetary policy. In an interview with a French newspaper, Cipollone expressed concern that the ECB's stance might become excessively restrictive, potentially hampering the economy's recovery.

In June, the ECB lowered rates from a record high, and further easing is widely expected at the upcoming meeting on September 12. However, with the growth outlook worsening over the summer, policymakers are now debating whether the ECB has fallen behind in responding to the economic slowdown.

While Cipollone stopped short of explicitly advocating for a rate cut in September, as many of his colleagues have, he emphasized that inflation is following the trajectory set out three months ago, which already factored in policy easing in both September and December.

"The data we have so far confirms our current approach, and I hope it will allow us to continue easing our policies," Cipollone told Le Monde. He added, "There is a genuine risk that our stance could become too restrictive. We need to ensure that inflation aligns with our target without unnecessarily restraining the economy."

Financial markets have already priced in at least two more rate cuts this year, in September and December, with a possible additional move in October. This expectation is driven by both the weak growth outlook and the anticipation that the U.S. Federal Reserve will swiftly ease its policy, potentially compelling the ECB to follow suit.

Cipollone also highlighted concerns about weak economic growth, pointing to the lackluster improvement in competitiveness as a contributing factor. "Recent data, such as consumer confidence and activity indicators, particularly in the manufacturing sector, have not been very encouraging," he noted. "This presents a risk to the growth outlook for the euro area."

He also observed that investment remains subdued, suggesting that businesses lack confidence in a robust recovery. This could ultimately undermine the bloc's future growth potential by limiting its ability to develop and adopt new technologies.