The Zhitong Finance App learned that ECB Governing Council member Primoz Dolentz said that the tightening of financial conditions may reduce the need for the ECB to take monetary policy action. While attending the International Monetary Fund (IMF) annual meeting there, he said in an interview, “We have seen a considerable degree of repricing in the market,” and “if the financial market tightens, then we probably don't have to do as much as we originally did.”
After two rate hikes, policymakers are debating how much more interest rates will need to be raised to bring an inflation rate close to 4% back to the target. Price pressure in September was stronger than expected, and economic resilience was beyond imagination.
Economists expect the ECB to raise interest rates for the last time in December, when deposit interest rates will rise to 2.75% — a level some estimate will begin to dampen economic activity.
When asked about this outlook, Dolentz said the ECB “is approaching a restricted area — it may not have fully reached it, but it is on the verge”.
European Central Bank Management Committee member Pierre Weinsch and Bank of Lithuania Governor Gediminas Simkus emphasized the latest inflation data in separate interviews, believing that further tightening may still be needed. The latter said that although the December action will be based on more data, this month's action cannot be ruled out.
“Our situation is that the second-round effect has not yet been apparent,” Dolentz said, echoing similar remarks made by Simkus and ECB President Christine Lagarde earlier this week.
Bank of Portugal Governor Alvaro Santos Pereira also said, “The good news is that inflation in Europe has not spread so far,” adding that he “has no doubt” that the ECB will meet its price targets.
Any decision will be complicated by investors' concerns about the financial situation of France and other highly indebted member countries in the Eurozone. France led the recent sell-off in the bond market, driving 10-year treasury yields to a high level not seen in nearly a quarter of a century.
Bank of France Governor Emmanuel Moulin believes that higher sovereign borrowing costs are putting pressure on financial conditions and may curb demand as well as inflation.
Meanwhile, economists and investors are speculating to what extent market conditions will worsen before the ECB is willing to intervene.
“We have different monetary policy measures in our toolbox, even including transmission protection instruments (TPIs),” Dolentz said. “If necessary and conditions are met, they will be used, or will be used. It's hard to guess when, how, and why the different tools will be used right now.”
Bank of Austria Governor Martin Koch agreed.
“An upfront commitment would be bad,” he said. “The ECB has a toolbox. The toolbox allows quite a few tools, and I don't think we've reached the stage where we need to discuss any of them. But if needed, they're there.”
Koch also stressed that some ECB observers suggest that quantitative austerity (QT) can be suspended to eliminate sources of market pressure, but quantitative austerity “is actually gradual.”
“It's passive and very predictable,” he said. “In terms of bond prices and bond yields, are there likely to be any developments in the market that require adjustments to this policy? We don't know.”
Lagarde herself is French, and she gave the ball to President Emmanuel Macron's administration to encourage politicians to work to cut the deficit that has soared to nearly double the upper limit allowed by EU rules. But she also recently told a group of finance ministers that the ECB has the tools to deal with the situation if necessary.
In Europe, the US, and beyond, the rising cost of government borrowing was a major topic at the Bangkok Meeting of Global Financial Officials. IMF Managing Director Kristalina Georgieva last week called on policymakers to take urgent action to reduce high debt and budget deficits.