ECB’s Elderson: If Baseline Persists, We Will Have To Hike Interest Rates More
30 March 2023
By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Frank Elderson on Thursday confirmed that interest rates would rise further if the ECB’s baseline materialised, but that specifics would hinge on developments up to the day of the decision.
In an interview with Spanish daily El País, Elderson reiterated ECB President Christine Lagarde’s guidance that ‘[i]f – and this is a big “if” – the baseline scenario we discussed at our last meeting persists, there will still be more ground to cover and we will have to raise interest rates further. ‘
‘Those grounds to cover would not only depend on how market tensions evolve but also on underlying inflation convincingly turning the corner’, he said. ‘But there is certainly additional uncertainty, so we cannot say with any precision how monetary policy will evolve from here.’
‘One thing is clear: inflation is too high and we have to bring it down’, he said.
Nevertheless, Elderson insisted that ‘there is no trade-off between price stability and financial stability. We are not caught between a rock and a hard place, as our decision to raise interest rates by 50bp shows.’
The ECB in any case has ‘instruments to cater for both aspects’, he said.
Silicon Valley Bank, whose insolvency was at the origin of the banking sector turmoil, had been ‘extremely exposed to interest rate adjustments, and its core business was highly concentrated’, he said. ‘These characteristics are not as salient in euro area banks’, which are ‘sound and resilient’ and have ‘robust capital and liquidity levels.’
Asked whether the ECB would make the same decision now as it did at the monetary policy meeting two weeks ago, Elderson said that enduring prospects of ‘far too high’ inflation meant ‘that decision is as robust today as it was when we took it.’
The market tensions however made for a context in which the ECB deemed it preferable to omit any indication of specific intentions, he said. Rather, it now emphasizes its reaction function, including ‘the inflation outlook, based on our analysis of the incoming economic and financial data; the underlying inflation dynamics; and the strength of monetary policy transmission’, he said.
The ECB is thus not committed to any particular future decision, but only to doing what its objective requires, he said.
The updated macroeconomic projections unveiled two weeks ago ‘do not take into account recent market developments’, which is why it became especially important for the ECB to share its reaction function, he said.
‘The data evolve, and our assessment along with them’, he said. ‘That’s why we cannot pre-empt today any decision to be taken in May.’