According to Zhitong Finance APP, European Central Bank Governing Council member Primoz Dolenc stated that tightening financial conditions may reduce the need for the ECB to take monetary policy action. Speaking in an interview on the sidelines of the International Monetary Fund (IMF) annual meeting, he said, "We have already seen a considerable degree of repricing in the market," adding, "If financial markets tighten, then we may not need to do as much as we otherwise would."
After two rate hikes, policymakers are debating how much further rates need to rise to bring inflation, which is approaching 4%, back to target. September price pressures came in stronger than expected, and economic resilience also exceeded expectations. Economists expect the ECB to deliver a final rate hike in December, which would lift the deposit rate to 2.75% 鈥?a level some estimate would begin to restrain economic activity.
When asked about this outlook, Dolenc said the ECB is "approaching restrictive territory 鈥?perhaps not fully there yet, but on the edge." ECB Governing Council members and Belgian Central Bank Governor Pierre Wunsch and Lithuanian Central Bank Governor Gediminas Simkus separately emphasized the latest inflation data in interviews, suggesting further tightening may still be needed. The latter said that although the December move will be based on more data, action this month cannot be ruled out either.
"Our situation is that second-round effects have not yet appeared, or have not yet appeared significantly," Dolenc said, echoing similar remarks made earlier this week by Simkus and ECB President Christine Lagarde. Portuguese Central Bank Governor Alvaro Santos Pereira said separately that "the good news is that, so far, European inflation has not spread," adding that he has "no doubt" the ECB will achieve its price target.
Any decision will be complicated by investor concerns over the fiscal positions of France and other highly indebted euro area member states. France has led the recent bond market selloff, pushing 10-year government bond yields to levels not seen in nearly a quarter of a century. French Central Bank Governor Emmanuel Moulin believes that higher sovereign borrowing costs are putting pressure on financial conditions, potentially dampening demand and also restraining inflation.
Meanwhile, economists and investors are speculating about how much market conditions would need to deteriorate before the ECB would be willing to intervene. "We have different monetary policy measures in our toolbox, including even the Transmission Protection Instrument (TPI)," Dolenc said. "If necessary and if the conditions are met, they will be used, or may be used. At present, it is difficult to speculate about when, in what way, and why different tools will be used."
Austrian Central Bank Governor Martin Kocher agreed. "Pre-commitment would be disadvantageous," he said. "The ECB has a toolbox. The toolbox allows for quite a number of tools, and I think we have not yet reached the stage where we need to discuss any of them. But if needed, they are there."
Kocher also stressed that some ECB observers have suggested pausing quantitative tightening (QT) to remove a source of market pressure, but quantitative tightening is "actually gradual." "It is passive and very predictable," he said. "In terms of bond prices and bond yields, is there any market development that might require adjusting this policy? We do not know."
Lagarde herself is French, and she passed the ball to the government of President Emmanuel Macron, encouraging politicians to work to reduce the deficit, which has soared to nearly twice the upper limit allowed by EU rules. But she also recently told a group of finance ministers that the ECB has tools to respond to the situation if necessary.
In Europe, the United States, and other regions, rising government borrowing costs were a major topic at the Bangkok meeting of global financial officials. IMF Managing Director Kristalina Georgieva called last week for policymakers to take urgent action to reduce high debt and budget deficits.
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