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ECB to Reach Rate Peak During Next Three Meetings, Villeroy Says

ECB to Reach Rate Peak During Next Three Meetings, Villeroy Says
Francois Villeroy de Galhau, governor of the Bank of France, speaks at the Peterson Institute for International Economics in Washington, DC, US, on Wednesday, April 12, 2023. Villeroy said the European Central Bank has already completed most of the interest-rate rises it needs to combat sticky underlying inflation, with the biggest impact of past increases yet to come. Photographer: Anna Rose Layden/Bloomberg

The European Central Bank will reach a peak in interest rates during its next three meetings without necessarily hiking at each one, according to Governing Council member Francois Villeroy de Galhau.

The Bank of France chief said it was “wise and cautious” to have slowed the pace of increases to 25 basis points this month as officials monitor the effect of their unprecedented bout of monetary tightening to date.

Once the so-called terminal rate is reached, the ECB should maintain borrowing costs there for a period of time, he reiterated.

“We already have completed most of our rate-hiking journey, and we are clearly in restrictive territory,” Villeroy said Monday in a speech at the National Association for Business Economics symposium in Paris. “We have three possible Governing Councils either for hiking or pausing.”

While investors and most economists reckon the ECB’s tightening campaign will conclude in July, policymakers are increasingly flagging the possibility of it stretching to the following meeting, in September, as underlying inflation proves stubborn.

Assessing how long is required for the steps taken so far to feed through to the economy is becoming the key battleground inside the 26-member Governing Council.

President Christine Lagarde said Sunday that while the ECB has covered a large part of its journey in battling inflation, the process isn’t yet complete and current economic data don’t warrant a pause.

Some of her colleagues are noticeably more hawkish, with Austria’s Robert Holzmann saying the ECB must raise the deposit rate above 4% from 3.25% now to get a grip on inflation.

Read more on the ECB:
ECB Has More Ground to Cover to Tame Inflation, Lagarde Says

ECB Must Put Core Inflation on Downward Trajectory, Vujcic Says

Guindos Says Accelerating Services Inflation a Worry for ECB

Money markets have assigned a near 100% probability to another quarter-point rate hike at the June 15 meeting and price a peak in September of just above 3.75%.

In his speech, Villeroy said a cautious approach is warranted because it may take longer than in previous cycles for the impact of rate hikes to kick in — even if there’s evidence of a quick pass-through to financing conditions.

That’s in part because ECB interest rates began at such low levels, and because of a higher proportion of fixed-rate loans since the financial crisis, he said. The origin of inflation — in supply shocks rather than primarily from demand — also played a role.

“In the usual alleged time lag of one to two years for monetary transmission, our economic situation makes it likely that we are presently closer to the upper range,” Villeroy said.

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