MARRAKESH/FRANKFURT (Reuters) – Monetary policymakers at the European Central Bank (ECB) expressed cautious optimism on Thursday, saying inflation was on track to return to 2% even without further hikes. rates, while emphasizing the need for governments to maintain a certain budgetary discipline.
The ECB raised its key interest rate to a record 4.0% last month, but signaled that its tenth hike in 14 months could be its last, at least for now, given that the economy is slowing and could even enter a recession.
Adding to an already long list of policymakers advocating for a pause in rate hikes, Bank of France Governor François Villeroy de Galhau and his Greek counterpart, Yannis Stournaras, have both downplayed the need for further monetary tightening, arguing that rates were already high enough to bring down inflation.
The comments came as minutes of the ECB’s latest meeting, published on Thursday, showed monetary policy discussions were tight, with tactical considerations convincing the central bank to raise rates.
“Opting for a pause when the decision was, for the first time, so close, could be interpreted as a weakening of the ECB’s resolve, particularly at a time when headline inflation and underlying inflation are greater than 5%,” the ECB said.
A solid majority of officials voted in favor of raising rates, but perceptions of risk have evolved, with policymakers believing that risks to inflation are more balanced and that the costs of overtightening and the cost of insufficient tightening are also more balanced.
ECB models also suggest that a deposit rate in the range of 3.75% to 4.0% could bring inflation down to 2%, provided the ECB maintains this level long enough.
NO WORRY ABOUT ITALY
With rates at a record low and inflation falling, officials have preferred to focus on growth, recession potential and budget issues.
“If we can follow a monetary path that ensures a soft landing (…) it is a much better path for our fellow citizens,” François Villeroy de Galhau said at a conference in Marrakech.
Meanwhile, Yannis Stournaras noted that borrowing costs had already increased since the ECB’s last monetary policy meeting due to rising bond yields, raising the question of the point of tightening additional.
These higher borrowing costs represent a risk for Italy, as investors view the country as particularly vulnerable, due to its high budget deficit, large debt and lack of public finance discipline.
Yannis Stournaras played down concerns about Italy, but he also called for the ECB to end early reinvestments in its 1.7 trillion euro pandemic emergency purchase programme.
“The situation in Italy does not cause any particular concern at the moment,” added Yannis Stournaras.
Long-term bond yields have risen significantly since the ECB’s last meeting, as investors expect a period of large budget deficits and reduced or no support from central banks.
“The evolution of rate differentials reminds governments that it is necessary to coordinate fiscal and monetary policies,” recalled Bostjan Vasle, director of the Slovenian central bank.
“Fiscal discipline is necessary to limit these gaps,” Vasle added, referring to the premium countries must pay to borrow.
(Written by Balazs Koranyi, Francesco Canepa, French version Corentin Chappron, edited by Blandine Hénault)
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