Finland’s Valimaki says ECB should not jump to rate cuts By: Reuters

Written by Anne Kaulanen and Balazs Kolanyi

HELSINKI/FRANKFURT (Reuters) – The European Central Bank is on track to cut inflation to 2%, but more evidence is needed before interest rate cuts are on the table and policymakers may act prematurely. Instead, Finnish policymaker Tuomas Valimäki said, the government should wait “a little longer”. .

The ECB ended its earliest rate-hike cycle in September, and talk of policy easing is now on the agenda as inflation slows, but investors and policymakers are unsure of the timing of the first move. They are very different.

“It is better to wait a little longer than to come out of this restrictive level prematurely and perhaps have to reverse,” Valimäki, a member of the Bank of Finland board, said in an interview.

“We need to avoid prematurely declaring victory over inflation. It is better to wait and see how the wage data develops,” Valimaki added. He is a temporary but voting member of the ECB’s executive board, replacing President Olli Rehn, who is campaigning to become Finland’s next president.

Several major eurozone countries are due to decide on wages in the coming months, and ECB chief economist Philip Lane said the bank would have important data by the June Governing Council meeting, but until then This was seen as a hint that there would be no change in interest rates.

But investors are betting on an even sooner reversal, with the first step expected to take place in March or April, with a 150 basis point rate cut at a record 4% deposit rate.

Valimaki did not support any policy action calendar, but said he had seen no wage data so far to suggest that the ECB’s own December outlook or interest rate outlook was wrong.

Aggressive rate-cutting pricing may not actually advance the ECB’s actions, as the loosening of lending conditions, already evidenced by lower servicing costs for variable-rate mortgages, could even push up the inflation path. may be pushed back.

“But this depends on whether our forecasts are more accurate than the market’s forecasts, which is certainly what we believe,” Valimaki said.

While the region’s economies suffered weak, possibly negative growth in the second half of last year, Valimaki said this year still sees a “soft landing” – a gradual recovery from recession – even if the risks are skewed towards a more negative outcome. He said he is betting on.

Valimaki highlighted important discussions that could influence policy in the coming years, stressing that the ECB should maintain bond purchases and long-term lending to banks as a permanent means of providing liquidity to the financial sector. said it should.

The ECB is currently discussing its operating framework, and its decision, expected this spring, will affect the size of the ECB’s balance sheet in a neutral environment and how banks will have access to central bank funding. will have an impact on

A key debate is whether the ECB should maintain a “structural portfolio” of assets to ensure abundant liquidity in the system, or whether it should provide funds on an on-demand basis.

“In my view, it is desirable to permanently utilize both outright purchases and credit operations to provide structural liquidity to the banking system,” Valimaki said.

Such an operation could provide stable and well-diversified financial liquidity across the euro area, an economy much more banking-based than the United States.

But Valimaki said that no matter which option the ECB chooses, the overall size of the ECB’s balance sheet will continue to shrink, and excess liquidity, currently at 3.5 trillion euros, will continue to shrink for some time.