Assessing the ECB’s Monetary Policy Stance by Comparing Tightening Cycles
The main finding is that at the peak of the latest tightening cycle, the ECB monetary policy stance was no more restrictive than it was at the peak of the two preceding ones; actually, probably less.
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Executive Summary
The monetary policy stance of the ECB is assessed by comparing the recent tightening cycle, started in 2022 and now in the process of being concluded, with the two preceding tightening cycles, dated 2000-2001 and 2006-2008. This approach is limited in scope, in that it permits only comparisons between moments in time and does not provide a formal measure of whether and to what degree the current stance is actually restrictive or not. On the other hand, this approach is methodologically easier because it does not require an estimate of where the neutral interest rate currently is.
The main conclusion is that the ECB monetary policy stance at the peak of the recent tightening cycle was no more restrictive than it was at the peaks of the two preceding ones. Actually, it was probably less restrictive. This contrasts with the fact that the recent inflation outburst was far stronger and more persistent than during the two preceding episodes.
This raises the question of whether the current stance is consistent with the goal of completing the disinflation process. Two remarks are made to provide elements for an answer.
First, the disinflation process is, indeed, not complete. The recent drop of headline inflation (in September and October, at or below 2% price stability benchmark) depended entirely on the fall of imported energy prices, notoriously volatile and dependent on imponderable global factors.
Second, current short-term rates, nominal and real, especially after the cuts decided since June 2024, are below historical (pre-global financial crisis) levels. Coupled with information from other sources, including the ECB Bank Lending Survey, this suggests that euro area monetary and credit conditions currently are not restrictive.
It must be stated upfront that this paper deals exclusively with area-wide data, particularly on inflation. No references or conclusions are made on specific national or sectoral inflation rates, or to differentials among them. The ECB does not have a mandate or instruments to control inflation differentials, although its policy may affect them if the transmission process differs across nations or sectors. Therefore, any reference to inflation differentials while assessing the ECB monetary policy stance would be improper.
This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 4 December 2024.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
