Another interest-rate increase by the European Central Bank can’t be ruled out — even after Thursday’s signal from officials that borrowing costs may have reached a peak, Governing Council member Bostjan Vasle said.
(Bloomberg) — Another interest-rate increase by the European Central Bank can’t be ruled out — even after Thursday’s signal from officials that borrowing costs may have reached a peak, Governing Council member Bostjan Vasle said.
While slower economic growth should help policymakers in their quest to return price gains to the 2% goal, wage developments and fiscal policy still pose “significant risks,” according to Slovenia’s central bank governor. Recent energy-price pressures may also turn out to be more permanent.
“I wouldn’t exclude that further hikes might be necessary,” Vasle said in an interview in Santiago, Spain, where he’s attending a gathering of euro-zone finance chiefs. “What we’ll be doing in the future depends crucially on new information we’ll receive.”
The ECB raised interest rates for a 10th straight time on Thursday, while signaling they’re are now at a level that will substantially advance the fight against inflation, if maintained for a sufficient period of time. President Christine Lagarde, however, stressed that this didn’t mean borrowing costs have reached their peak.
Investors and analysts still drew that conclusion, with focus shifting to the timing of when the Frankfurt-based central bank will start lowering rates again.
Lagarde said Friday that cuts haven’t been “decided, discussed or even pronounced.” Vice President Luis de Guindos and Estonian central bank chief Madis Muller, however, both said the current level of rates may be sufficient to return inflation to 2%.
Policymakers “made it clear that, to the best of our knowledge, no further interest-rate hikes are expected in the coming months,” Muller said Friday in a blog post.
His Lithuanian counterpart, Gediminas Simkus, said he hopes the latest rate move was the final one.
At its next meeting, in October, the ECB will probably have gained little insight on how the economy is responding to the combined 450 basis points of rate hikes enacted since July 2022, with only one additional inflation reading due in the meantime, according to Vasle.
“At the December meeting, we’ll have an additional set of new information and also new forecasts,” he said. “We’ll have three more readings of inflation, we’ll have more information on what’s going on with growth dynamics. I believe this will add to the significance of this meeting.”
Whether this week’s hike would materialize was highly uncertain in the run-up to the meeting, though the decision was supported by a “solid majority” on the Governing Council, Lagarde said. While the move was criticized by politicians from Italy and Portugal, Vasle said he backed it.
“Core inflation is still relatively high,” he said. “Yesterday’s rate increase will importantly contribute to bringing inflation down.”
With all or at least most of the rate increases in the current tightening cycle out of the way, focus is also shifting to whether the ECB will adjust the process with which it’s trying to reduce its bloated balance sheet — also known as quantitative tightening. Vasle said he’s open to speeding up the unwinding of large-scale asset purchases conducted in the era of low interest rates.
“The recent increases and especially the current level of interest rates will open more space for deliberations on other segments of monetary policy, especially QT,” he said, adding that he sees greater potential to quicken the reduction of the €3.1 trillion Asset Purchase Program, as opposed to the pandemic portfolio where proceeds can be reinvested in a flexible way to keep bond yields in various euro-zone nations in check.
(Updates with ECB officials starting in sixth paragraph.)
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