Zhitong Finance App learned that ECB Management Committee member and Bank of Lithuania Governor Gediminas Simkus said that since data shows that price pressure continues to accumulate, the ECB may have to raise interest rates again. Simkus said in an interview that the September inflation data was higher than expected, energy costs were higher than predicted, and the labor market was still quite strong. While attending the International Monetary Fund (IMF) meeting in Bangkok, he said that although whether to raise interest rates at the end of the year will depend on more data, the possibility of action this month cannot be ruled out.
“Since September, we have had more evidence that some degree of monetary policy tightening may be needed,” Simkus said. “From a decision maker's point of view, you want to make decisions when you have the most data. The next such meeting is in December. But we can't overlook another meeting in October.”
In response to the impact on energy prices caused by the Middle East war, the ECB has raised interest rates twice this year. Markets and economists expect further action, but disagree on how high the cost of borrowing will rise.
Bank of Belgium Governor Pierre Winsch said on Wednesday, “We may have to raise interest rates again,” although uncertainty is still high.
Simkus said that up to now, the rise in oil and gas costs has not had an obvious second-round effect, which is consistent with ECB President Christine Lagarde's previous statement. But he warned, “The longer energy prices remain high, the higher the probability that they will spread.”
Simkus said that the rise in sovereign yields was an inverse factor, but at the same time he cautioned that he was not too worried about the Eurozone bond market; France recently dominated a round of sell-off.
“It's important to differentiate between market fragmentation and proper repricing of sovereign risk,” he said. “I think the rise in France's sovereign yield is due in particular to developments in the economic situation. The market is pricing debt levels, political uncertainty, and fiscal fundamentals.”
Simkus pointed out that it is “normal to some extent” for different countries to face different market borrowing costs. “Not every increase in sovereign yields,” he added, “should be interpreted as market fragmentation.”
The ECB has an unused crisis response tool — the Transmission Protection Tool (TPI). Simkus hinted that there is no need to activate the tool, at least for now.
“I'm sure things will work out,” he said. “Right now, I can't see any reason why the ECB needs to work.”
Simkus also addressed the independent issue of the ECB's minimum reserve requirement. Currently, banks are required to deposit 1% of specific liabilities (mainly customer deposits) in a special account with the central bank that does not accrue interest.
Discussions on this requirement have been ongoing for some time. Raising reserve requirements will allow central banks in the Eurozone to save interest payments to banks and help address losses caused by quantitative easing.
He believes that this is a “structural part” of the monetary policy framework rather than a “tool for active management.” “We should not change reserve requirements based on economic and monetary conditions,” Simkus said, adding that “there is nothing wrong with discussing it” and that the current level is not “immutable.”