The European Central Bank should maintain its interest rates at their current high levels long enough to control inflation but avoid more hikes that could torpedo the economy, the French central bank chief said Monday.
The ECB raised rates for a 10th straight time earlier this month, taking its deposit rate to a record four percent, but analysts believe the bank may now pause its hiking cycle. The ECB, the US Federal Reserve and other central banks have dramatically raised borrowing costs in efforts to tame consumer prices, which jumped higher following Russia’s invasion of Ukraine.
French central bank governor Francois Villeroy de Galhau said policymakers “now know with growing confidence that we are on the right track” towards bringing inflation back down to their two-percent target by 2025. “Based on our current assessment, we consider that our key ECB interest rates have reached levels that, maintained for a sufficiently long duration, are broadly consistent with the timely return (of) inflation to our target,” he said.
The ECB governing council member said the Frankfurt-based institution can now work towards ensuring the eurozone economy goes into a “soft landing” — a slowdown without recession. “The risk of doing too much needs to be balanced against the risk of not doing enough,” Villeroy de Galhau said in prepared remarks at a central bank conference in Pairs.”In my judgement, these risks are now at least symmetric,” he added, defending an approach of “patience and persistence”.
He said the ECB does not need to raise rates for now but could do so again if necessary. “This is a manageable risk because we always can do more if the risk materialises,” Villeroy de Galhau said.”But in the risk of doing too much, with the economy falling into recession and causing a sharp deceleration of inflation, we would then have to rapidly reverse course,” he added.
The ECB’s decisions should remain dependent on economic data and the central bank should monitor the current spike in oil prices, the French central banker said, while warning against the “risk of easing too early”.”We should now focus on the persistence of policy rather than the constant pushing of rates higher — duration rather than level,” he said.