The European Central Bank's top policymakers outlined the contours of a looming policy debate on Wednesday, taking opposing views on inflation risks and on how much the bank is still holding back the economy.
The ECB has cut interest rates five times since last June and policymakers are increasingly vocal in their debate about just how much farther rates must come down when inflation is still a bit too high but economic growth is barely above zero.
ECB board member Isabel Schnabel, one of the most vocal policy hawks, argued that it was already time to debate a pause because the 2.75% deposit rate is no longer undoubtedly restrictive on the economy.
"We are getting closer to the point where we may have to pause or halt our rate cuts," the Financial Times quoted Schnabel as saying on Wednesday. "I’m not saying that we’re there yet. But we have to start the discussion."
The ECB has already removed a reference to wanting to keep policy "restrictive" and this has fuelled a debate on where restriction ends, a hard to define and mostly subjective level.
"The data are showing that the degree of restriction has come down significantly, up to a point where we can no longer say with confidence that our monetary policy is still restrictive," Schnabel said.
Those comments follow remarks just days ago that monetary policy is still restrictive, which is increasingly unnecessary given that inflation is nearly on target and domestic demand is weak.
The two policymakers, considered key opinion leaders on the 26-member Governing Council, also took different views on where inflation may be going.
Schnabel said energy prices are creating a risk for inflation and the ECB could get back to target later than now expected.
"I see risks to our inflation outlook as somewhat skewed to the upside," Schnabel said. "So I would not exclude that inflation comes back to 2% later than we had anticipated."
Panetta, meanwhile, came to a different conclusion.
"The available indicators seem to suggest that the predominant risk remains inflation falling below 2% over the medium term," he said on Saturday.
The ECB will next meet on March 6 and a rate cut then is fully priced in, since no policymaker has openly challenged that move. However, market pricing and policymaker commentary suggests that the debate about the following step is genuinely open and a cut on April 17 is not a given.
