ECB Could Hike or Pause at either of Its Next Three Meetings, Villeroy Says

22 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – The European Central Bank could hike or pause at either of its next three meetings, but in any case should wrap up its hiking cycle by September at the latest, ECB Governing Council member François Villeroy de Galhau said on Monday.

Speaking at the National Association for Business Economics and Banque de France International Economic Symposium in Paris, Villeroy, who heads the Banque de France, said there were ‘three possible Governing Councils either for hiking or pausing’ in June, July and September. He repeated his words from January that the ECB would ‘be at the terminal rate not later than by summer […] which starts in June and ends in September.’

Listeners shouldn’t ‘deduce a guidance […] or a preference for a given terminal rate’ from his comments, he said, adding that the ECB ‘will remain data driven, looking meeting by meeting at the outlook for headline inflation as well as for the dynamics of underlying inflation and the strength of monetary policy transmission.’

The ECB’s deceleration from 50bp to 25bp ‘was wise and cautious’, he said. ‘We obviously keep our hands free, but we add the capacity of observing and monitoring the pass-through of our substantial and exceptionally rapid past hikes.’

‘Persistence is now more important than speed; the duration for which we will maintain rates is now more important than the precise terminal level we will reach’, he said.

The ECB was now ‘clearly in restrictive territory’, he argued, and had ‘completed most of our rate-hiking journey’.

‘In the current tightening cycle, several factors suggest that the lag in transmission of policy to the real economy may be at the upper end of the two-year range’, he said. This transmission would be first be felt in ‘the restrictive effects on activity’, these being ‘quicker than the dampening effects on inflation’, which meant that the ECB ‘should be patient and consistent, including in our explanations to the broad public', he said.

Inflation would take longer to go down than it took to go up, he predicted: ‘the decline in energy and input costs, currently occurring as tensions and bottlenecks in supply chains ease, may not fully translate yet into lower inflation.’

Services inflation was ‘likely to become the dominant source of inflation in the euro area’ in the near future, he said. These sectors were ‘less directly sensitive to interest rates’, so the dampening effect of monetary policy would ‘take more time.’