ECB has completed most of its rate-hiking journey, Villeroy says

THE European Central Bank (ECB) has already completed most of the interest-rate rises it needs to combat sticky underlying inflation, with the biggest impact of past increases yet to come, Governing Council member Francois Villeroy de Galhau said.

“We may possibly still have a little way to go on rate hikes at our next meetings,” Villeroy said on Wednesday (Apr 12) in a speech at the Peterson Institute for International Economics in Washington. “Though I think it premature to decide now what we’ll do in May.”

The French central banker said: “We have already completed most of our rate-hiking journey and the strongest economic effect ahead of us will be the pass-through of what’s already in the pipe.”

The comments underscore a growing consensus among policymakers that the most aggressive bout of monetary tightening in the history of the eurozone may be nearing its conclusion.

As for what comes next, Villeroy described a more “open” phase as the ECB is guided by headline inflation, the dynamics of underlying prices and the extent to which restrictive policy is transmitted through the economy.

Some Governing Council members want the ECB to maintain a faster tightening pace. Austrian hawk Robert Holzmann said earlier on Wednesday that a fourth straight 50 basis-point increase in May is still warranted given stubbornly high inflation.

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Villeroy cautioned that the growth in core prices — which excludes energy and food costs — “remains strong and is proving sticky”. A turnaround in its trajectory should be the trigger for ceasing hikes, he said.

Money-market investors are betting the ECB’s deposit rate will hit a maximum of 3.75 per cent by October — up from 3 per cent currently. They see the first quarter-point cut arriving by March 2024.

Villeroy said the ECB should maintain borrowing costs at their peak for as long as necessary. “For interest rates, as with ballistics, longer is becoming more significant than higher,” he said. BLOOMBERG