Inflation undershoots to jumbo cuts: What 10 European Central Bank members said this week

After the European Central Bank cut interest rates for the third time this year — and inflation fell below target — all eyes are now on policymakers’ next move.

A slew of Governing Council members spoke to CNBC’s Karen Tso at the International Monetary Fund’s annual meeting in Washington, D.C. this week. We asked them about the inflation outlook, the chances of a jumbo 50-basis-point interest cut in December, and more.

On a 50-basis-point rate cut: “Well, everything should be on the table, you know, given what the data tells us. But we will have that discussion in December, and we will have the discussion then early next year, and from meeting to meeting … With us approaching the 2% target, and with the economy being quite weak for the rates, the way is down at 3.25, we are still quite considerably in the restrictive territory.

“So easing up the pressure from the rates, of course, is what we would need to do, and this is what we would do. But of course, you know, we need to see the data … There is both 0% cut, 25 basis point cut, you know, and there is also perhaps a bigger cut possibility, but that will all depend upon data.”

“Well, if you say you’re data dependent, you are data dependent. I don’t want to anticipate on what the data are going to tell us. There might be discussion, indeed, on whether we need to remove restriction faster than we thought, or not. Again, depending on the data. A 50-point move would be a big move, so I think it would only be justified if we have data, which would be, you know, going down on inflation. But probably also in terms of GDP growth going in the wrong direction, which is not really what we see today.

“… I’m not excluding anything, but we’ve started quite early in cutting rates. I think it’s good if we can be … gradual and not create volatility in the market that would be unwarranted.”

“Data will tell, but the truth is that the print of inflation in September was very low, way lower than what we were expecting. This was true for headline but also for core. So we have converged, inflation is as close to 2% in the medium term as it can be, and we need to take that into our story.

“After that, we need to look at the incoming data, the trends in the data that we have been observing. And certainly, 50 basis points can be on the table, because we continue to be data dependent, and the data we are getting points in that direction.”

“Are we risking a structural undershoot of our inflation target? I don’t think so. And why not? Well, look at wages. Wages are still running at a pace which is double the pace that would be consistent with the return to a 2% inflation target and half a percent productivity growth.

“Unfortunately, we don’t have more productivity growth in the euro area, so as long as wages are still at that elevated level, yes, there could be a temporary undershoot of our target, but I don’t think the risk of a structural, longer-term undershoot is all that significant.

“The 1.7 [September inflation print] is a temporary blip. It’s entirely due to base effects and it will likely disappear from the data again in the coming months. So we really take a medium-term orientation for our policy, and that statement [about returning inflation to 2%] is meant to assure that, yes, on the medium term, we are committed and we are dedicated to bring[ing] inflation back to 2%, our target.”

“I’m sure some of my colleagues will go for a big cut, others not. In my case, I will say I will look at the data.

“If things really get as bad as some claim, we can have another 25 [basis point cut], [but] 50? I would say at the moment with the data, no.”

On rate cuts: “This discussion about 25 or maybe something different is not helpful. We are living in a very uncertain environment so we have to wait for the new data and then we have to decide.

“We did what we did [at the October meeting], and this is based on the way we conducted monetary policy over the past, so we keep our flexibility in every direction.”

On inflation: “I think we shouldn’t become too complacent here. There was the [below target] September data … maybe there’s also a certain probability that the upcoming data for October, November, December might go in the other direction. So as I said, we should keep our flexibility here, data-dependent approach, I think this is the best strategy that really worked well over the last two and a half years.”

On inflation: “Victory is in sight, but we shouldn’t be complacent.”

On the chance of an economic soft landing: “I think we can have a reasonable degree of confidence. Remember two years ago there were many fears on both sides of the Atlantic that we would have a recession, and that the so-called sacrifice ratio, the price to pay in terms of growth for coming back to the inflation target, would be vey high. It’s not the case.

“I think that our path credibility played a significant role, because we were credible, inflation expectations remained well-anchored, and so the level of interest rates in this last episode of disinflation was much lower than, remember 50 years ago, the Volcker episode.”

On the economy: “I think we have both good news and worse news from Europe. The good news is that disinflation is on track. That’s important. It’s improving the real incomes of our households and citizens. Also, employment has remained, overall, quite robust. On the other hand, we see a weakened growth outlook, and we see that productivity growth is the Achilles heel of Europe. So it’s been one factor that prompted us to decide rate cuts last week, to cut rates by 25 basis points in Europe, because disinflation is on track, and because we are seeing a weakened growth outlook, which is also increasing disinflationary pressures.”

On rate cuts: “The direction is clear. We are continuing the rate-cutting cycle. The speed and scale of rate cuts depends on the incoming data. And we are looking, in particular, [at] three factors, three variables in this regard. First, the inflation output; second, underlying inflation, i.e. neutralized from energy and food prices, and third, the strength of monetary policy transmission. That’s data dependency. For me, it is not, certainly, any kind of data-point dependency. It’s even more, I would say, analysis dependency.”

On rate cuts: “We are clearly moving … towards the direction of easing monetary policy. So what, at this point, I can clearly say that, in the coming meetings … [we are] definitely going to see some cuts. But what are the cuts? How big they are, or if they are, it will depend on the data that we have at the moment of the decision.

” … I don’t think these super cuts, you know, are somehow grounded, unless we see, we clearly see, we really see something unexpected and bad and expected in the data. And so far, we didn’t think that … this would be a case. But the October decision for me is literally what we mean by meeting, by meeting, dependent on data decision. As the data showed: we need to take this decision. We made it.”

On the economy: “Well, in Europe, it does not look as good as it did six months ago or three months ago. It’s true that the current PMIs, particularly, are showing the slowing down of the economy. Much of it, I’m afraid, is structural. Part of it is cyclical … Of course, we are now on the way down with our rates, which will help the cyclical component … but the structural one is something that will have to be addressed in [the] medium term.”

On rate cuts: “I’m completely open to any discussion in December. Personally, I don’t know what the decision will be, nor I think we should know at the moment, because we should wait if we are data dependent, we should not now talk about 25 [basis points] versus 50, or maybe a pause in December. Anything can happen depending on the incoming data.”