RegStream

Interview with Piero Cipollone, conducted by Balazs Koranyi and Francesco Canepa6 February 2025

The ECB has said that the direction of travel for monetary policy is clear, but the timing and extent of moves is not. What does this guidance mean to you?

We are moving towards the target. The direction of inflation is clear, despite some small bumps. All incoming information points to a convergence with the target in 2025 and this is what our models are also telling us.

Our models include market expectations for the interest rate path, so this convergence with the inflation target is coherent with a declining interest rate path.

Everything is of course contingent on the information at the time of the forecasts, and we will have a new forecast round in March. Before then, we’ll get another inflation print, we’ll have more details on the composition of inflation, and all these feed into the model, as do market expectations for interest rates.

Does that mean implicitly that you are comfortable with market expectations for further rate cuts as they are embedded in the projections?

That was conditional on the information we had in December. I am comfortable as long as that path takes us to the target in the medium term in a sustainable way.

What does the data since that December meeting tell you?

Overall, I think the direction is the same. I don’t see huge changes in our view, except trade tensions. The overall understanding of where we are going is there, the fundamentals haven’t changed, so I do not expect a big change in direction.

One thing that might happen is a trade war with the United States. How would that affect your thinking?

It depends on details such as whether we retaliate, precisely what these tariffs are going to be levied on, and how China is affected.

If tariffs are imposed on us, the most immediate impact will be on growth.

The price of goods will be higher in the United States. Who is going to absorb the cost? It could be that European companies, in order to defend their market share, might be willing to sacrifice a bit of their margin in order to stay in the market. We have seen this many times and European firms have a great ability to adjust. Part of this sacrifice might be recovered through the exchange rate. So, in the end, the overall impact may not be that big.

What concerns me more is if President Trump engages in a full trade war with China. This is a more serious threat because China has 35% of the world’s manufacturing capacity. Trade barriers will force China to sell its goods elsewhere and the competition from China could be a serious threat to us. These goods showing up in Europe could have both a deflationary and a contractionary impact because they would crowd out local products.

The uncertainty is exceptionally high, everything is in motion. And we can’t assess where it’s all going until things fall in place.

It’s true we have a goods surplus with the United States. But if you add in services and look at the overall current account, then the balance is close to zero.

Looking at the very short term, can you support a rate cut in March, as some of your colleagues are already saying?

I don’t want to seem elusive, but the uncertainty is so high that anything can happen. We all agree there is still room for adjusting rates downwards. But we need to be extremely careful. It’s important to stress this idea of a meeting-by-meeting, data-dependent approach. I want to enter the meeting with an open mind, see the staff assessment and process incoming data.

But we also all agree that we are still in a restrictive territory.

Suppose tariffs on China stay, that’s a huge demand shock. On the other hand, we have energy prices moving upwards. It could be a transitory phenomenon, but what if this is more entrenched?

How far are we from the neutral rate and why has the neutral gone up?

When you have an estimate range that is 50 or 75 basis points, then it’s a conceptual tool and doesn’t have much bearing on policy, given the high uncertainty. Take estimates that it is between 1. 75% and 2. 25%. Those are two completely different monetary policies, if you are close to target. It’s such a wide range that one number could imply that you are undershooting and another that you are overshooting. So “neutral” is a very powerful analytical concept but not terribly useful for setting monetary policy, given this embedded uncertainty.

It’s possible this rate went up but it’s also possible it stayed unchanged given how wide the band is.

You say you are clearly restrictive now. Would that still apply after the next cut? When does the debate start on when restrictive ends?

We are almost on target. The closer you get to target, the less you’ll need to stay restrictive.

It’s also true we have been overly optimistic on growth and had to cut our growth forecasts three times since June. So, it is possible that the recovery is not as strong as expected and thus the inflationary pressure coming from demand is weaker. This could prompt us to reassess our concept of restrictiveness.

Could this mean that you need to become accommodative to avoid an undershoot?

I assess the risk around inflation to be balanced and I don’t have evidence of a possible undershoot. Long-term inflation expectations are also very well anchored.

The latest information, especially the rise in the cost of energy, makes me think that we should be prudent. It might be a transitory phenomenon, but prices have risen substantially. Consumer expectations have also gone up a little as they are very reactive to short-term developments.

I’m not saying that risks are moving towards being on the upside, but we have no evidence of undershooting either.

Do the growth revisions suggest fundamental changes in how the economy functions?

Growth has been disappointing, especially because of investments. Consumption may have been less buoyant than we thought, but it remains broadly on the path that we are expecting. The fundamentals for rising consumption are there. Real incomes are increasing, employment is high, inflation is declining and consumer confidence is holding steady.

The real problem is investments, and that is only partially linked to monetary policy. The culprit is uncertainty. Investments have been weak since the summer given the overall uncertainty and the direction of trade policy after the US election.

My sense is that people are holding out before making important investment decisions. There is of course a cost component related to interest rates. But you see that people are investing just to replace old capital stock.

What can the ECB do about it?

We have to take care of the cost component and avoid being unduly restrictive. Our goal should be to have the economy growing close to potential and to contribute to reducing uncertainty as much as possible.

Could another targeted longer-term refinancing operation help investments?

It doesn’t seem to me that the lack of available funding is the issue. We have seen some tightening of credit conditions but that’s not the key factor here.

Last week we were talking about a 25% tariff, today not anymore, and tomorrow we don’t know. All companies are trying to understand where it’s all going so that they can make investment decisions.

How does this uncertainty affect the labour market?

There could be some softening of the labour market but overall we have been positively surprised. We went through a huge disinflation process with a very strong labour market.

Labour hoarding has two dimensions. One is the cost. Overall, the cost is still relatively low because, by some measures, real wages are still below the pre- pandemic level. The second reason is that firms are afraid of losing skilled labour and this is still the case.

The labour market is softening, however. The problem is manufacturing essentially. But even there we see some light at the end of the tunnel. There seem to be some initial signs of recovery in the Purchasing Managers’ Index and the Economic Sentiment Indicator. I was surprised to see that confidence in the construction sector and manufacturing activity have bottomed out, and we see some possible signs of recovery. Services are holding up overall. If there is some softening in terms of demand for labour, possibly there will be a pick-up in productivity which will reduce the unit labour cost overall. We obviously need to monitor it because, with all this uncertainty, we could see a deterioration. But I am not overly concerned about the labour market.

Adding up what you said about these modest signs of recovery in manufacturing, does that mean you still believe in the soft-landing narrative and you don’t see a recession?

We might not be booming but I am not expecting a recession at all. I think consumption will slowly go up because the fundamentals are there, labour income is growing, the cost of borrowing is declining, inflation is declining, and consumer confidence is basically holding up, so it’s possible that the savings rate will decline from a historic high. So, overall, I think consumption will keep going – and that is a big chunk of the economy. Investment should recover too, as soon as all this uncertainty dissipates. First, one cannot hold back forever: imagine you have a bunch of cumulated investment decisions to make. Even if a small percentage of them go through, it will be a positive and you will see that in investment. Second, less restrictive financial conditions are slowly being transmitted to the cost of financing. And third, in 2025-26 we should see an acceleration in the spending of Next Generation EU funds in Europe.

Moving to the digital euro. Could you give us an update?

We have started the procurement process and we will be selecting suppliers in June, but the contracts are such that they will only be triggered if the Governing Council decides to issue the digital euro. We have been working on the rulebook and we will be able to finalise it shortly after we have firm EU legislation in place. For example, whether people can have access to one or more wallets will have an influence on the rulebook, so if we don’t have a final legislation, we cannot finalise the rulebook. But it will not take long once the legislation is approved because we have done as much work as possible in the absence of a firm legislation. So the procurement is done and the rulebook is almost done. We are also working with the market to leverage the innovation potential of the digital euro. We think there is huge potential in conditional payments to increase the quality and the menu of the offering on payments.

So that is a payment that only happens if a certain condition is fulfilled, right?

Today there is only one type of conditional payment and it is based on time: pay this amount to this person on this date. We think we can do better than that. To make sure that this intuition is right, at the end of October, we issued a call for innovation partnerships. We were surprised to receive 100 offers. People want to experiment with new ideas. We will be doing that for the next six months and we will then prepare a report.

Would conditional payments require a blockchain? How else would the condition be verified?

No, it’s not a matter of blockchain. If you have a way to register the transaction on the ledger through a sort of token, that is a possibility. But technicians tell me you can make a transaction conditional even on a traditional ledger. We are working on that, but the information that I can give you is that we can do better than what we are doing today on conditional payment, regardless of the underlying technology. The technology has a bearing on many dimensions, for example latency and privacy.

Could you give me an example of a conditional payment that could be settled in digital euro?

For example, if the train is late, today you have to ask to be reimbursed. You could have a solution in which you only pay if the condition is automatically verified.

To conclude with where we are in the preparation phase, let me add that since the digital euro is a product, we have to market it. So, we are engaging with focus groups and using surveys to understand how to best finalise the product in order to meet people’s expectations. We are on schedule, so we should be ready to take a decision on moving to the next project phase by November 2025. I don’t know whether at that time the Governing Council will already be able to take a decision to eventually issue a digital euro because that depends on whether we have a legislation at that point. We have been clear that we would not take any decision about the issuance of a digital euro before the legislative act has been adopted.

We had expected legislation on the digital euro some time ago. What’s holding up the process? Are you sensing a lack of political will?

I wouldn’t say there’s a lack of political will. I think people want to understand the whole process. The European Commission issued legislation in June 2023, then the European Parliament started to work on that, but mentally they were not there because there was an EU election coming up. Everything stopped. They are starting to work on this now so, to be fair to them, they didn’t have much time. By contrast, in the Council of the European Union’s working party, work is progressing. As far as I know, they have gone through all of the legislative proposal and they are now focusing on the issues that still need to be worked out. When both the Council and the Parliament have agreed internally, they will sit down with the Commission and try to finalise the legislation. So, we hope they will be able to reach an agreement internally before the summer. But again, political processes are complex and there are many things on the table. Obviously the sooner the better, but we fully understand their needs. My sense is that there is an increased sense of urgency because of the position that has been taken by the new US Administration. The fact that the US President went in so strong on this idea of promoting worldwide US dollar-denominated stablecoins obviously is a signal. The political world is becoming more alert to this. And it’s possible that we will see an acceleration in the process.

Stablecoins are similar to money market funds that people use if they don’t want to go via the banking system, whereas the digital euro, with its holding limit, will purely be a means of payment. Why do you think a digital euro would be a good response to stablecoins?  

You’re right, for as long as stablecoins are not used as a means of payment. My sense is that they will be. This is worrisome because if people in Europe start to use stablecoins to pay, given that most of them are American and dollar-based, they will be transferring their deposits from Europe to the United States. It may start with peer-to-peer, cross-border transactions. Then an American tourist may be able to use stablecoins instead of using a credit card, for example. So stablecoins can enter the payment space, for example, if they can compete with card schemes by reducing the price for the merchant. We have seen that important payment providers have already issued stablecoins, like PayPal, for example.

Turning now to bitcoin, we know that the ECB has got repo lines and swap lines with other central banks. Would the ECB maintain those with a central bank that has bitcoins among its reserves?

It’s an interesting question. Fortunately we don’t have to think about that right now because no major central bank is thinking about that.

One is hypothesising.

We would need to do a risk management assessment of that. Let’s see if any central bank enters this space because I don’t fully see the rationale for it. We will assess it at that point in time, if it happens. I am trying to be rational and think about why I should invest in bitcoin or another crypto-asset. The only rationale is if one thinks that the price will always go up. It doesn’t have any underlying value, there is no asset backing it, there is no earning model.

On that, it’s a bit like gold.

The structures of the two markets are completely different: the transparency of the market, the concentration. So, I would be careful about making the analogy. I don’t know how deep the market for gold is, but there are central banks in that market, and not just because of a legacy system. We should not stop at a superficial analogy between gold and bitcoin.

Why do central banks invest in gold, other than legacy?

It’s in part due to legacy, but gold has intrinsic, commercial and industrial value. Bitcoin does not have any of that.

We’ve seen gold and bitcoin make all-time highs at the same time. Or should we say that fiat currencies are making all-time lows?

Fiat currencies allow you, among other things, to pay. Good luck trying to pay in bitcoin or gold. Central bank money is the safest asset you can imagine and it's relatively stable in terms of what you can buy with it.