ECB Villeroy: At this stage further rate hikes not right thing to do

European Central Bank (ECB) Governing Council member Francois Villeroy de Galhau said on October 10, 2023, that further interest rate hikes are not the right thing to do at this stage.

"Interest rates are on a good level," Villeroy said in an interview with France Info. "Events in Israel add to economic incertitude. Wary about oil price developments over Israel situation." 

He added that there is no reason presently to tweak inflation prospects and they still see it converging to the 2% mark by 2025.

Villeroy's comments come as the ECB is facing increasing pressure from some economists and policymakers to raise rates more aggressively in an effort to combat inflation. The eurozone's annual inflation rate hit 9.1% in August, the highest level since the euro was introduced in 1999.

However, Villeroy and other ECB officials have argued that the central bank needs to be careful not to raise rates too quickly, as this could risk tipping the eurozone economy into a recession. They have also pointed out that inflation is largely being driven by factors outside of the ECB's control, such as the war in Ukraine and energy price shocks.

Villeroy's comments suggest that the ECB is likely to take a more gradual approach to raising rates in the coming months. This is in line with the central bank's forward guidance, which states that it expects to raise its key interest rates in several steps.

Implications for the eurozone economy

Villeroy's comments are likely to be welcomed by businesses and consumers in the eurozone, who are already facing higher costs due to inflation. A more gradual approach to raising rates would give them more time to adjust to the new economic environment.

However, some economists have warned that the ECB may be risking falling behind the curve in its fight against inflation. They argue that the central bank needs to act more aggressively in order to bring inflation back to its target level of 2%.

The ECB's next policy meeting is scheduled for October 27. At that meeting, the central bank is expected to announce a further increase in its key interest rates. However, the size of the increase is still uncertain.

What could lead the ECB to raise rates more aggressively?

If inflation continues to rise or if the eurozone economy shows signs of overheating, the ECB could be forced to raise rates more aggressively than currently planned.

The ECB is also likely to be watching closely the developments in the global economy. If the US Federal Reserve raises rates more aggressively than expected, this could put upward pressure on the euro and lead to higher inflation in the eurozone.

What could lead the ECB to slow down the pace of rate hikes?

If the eurozone economy shows signs of weakening, the ECB could be forced to slow down the pace of rate hikes or even pause its tightening cycle.

The ECB is also likely to be watching closely the developments in the war in Ukraine. If the war escalates or if there are further energy price shocks, this could damage the eurozone economy and lead to lower inflation.

Additional thoughts

In addition to the economic factors discussed above, the ECB is also likely to be taking into account political factors when making its decisions about interest rates.

For example, the ECB is likely to be aware that the eurozone is facing a number of challenges, including the war in Ukraine, the energy crisis, and the rising cost of living. These challenges could lead to social unrest and political instability.

The ECB is also likely to be aware that the eurozone is facing a number of elections in the coming months. These elections could lead to changes in government, which could in turn lead to changes in economic policy.

The ECB will need to carefully consider all of these factors when making its decisions about interest rates in the coming months.

Conclusion

The ECB is facing a difficult balancing act. It needs to raise rates in order to combat inflation, but it also needs to be careful not to raise rates too quickly, as this could risk tipping the eurozone economy into a recession.

Villeroy's comments suggest that the ECB is likely to take a more gradual approach to raising rates in the coming months. However, the central bank could be forced to raise rates more aggressively if inflation continues to rise or if the eurozone economy shows signs of overheating.