Sunday, April 14

ECB Executive: Interest Rates Must Continue to Rise Until Core Inflation Declines

The European Central Bank (ECB) must continue raising interest rates until so-called core inflation, i.e. the price hikes excluding sharply fluctuating energy and food prices, start to subside.

That said, ECB board member Fran├žois Villeroy de Galhau indicated that the rate hikes could possibly be continued at a somewhat slower pace.

“Until underlying inflation in the euro area has peaked, we must not stop raising interest rates,” the governor of the French central bank said in an interview with the Irish Times.

Focusing on the underlying components of inflation could mean that the ECB will continue to raise interest rates well into the following year, even if the overall price level declines due to declining energy prices. The European statistical office Eurostat previously announced that both headline and core inflation rose to record levels in October.

Villeroy expects headline inflation to peak in the first half of 2023, with the contribution of energy prices “probably starting to decline next spring”. Although the French central banker expects interest rates to be raised several times next year, he does think the ECB could switch to smaller interest rate steps than at recent meetings. In October, interest rates in the eurozone were raised for the second time in a row by three-quarters of a percentage point.

He says that smaller interest rate steps in the future are possible, as interest rates are already close to the level at which the economy is no longer stimulated. “It’s too early to say what the so-called final interest rate might be, but we’re not far from that neutral interest rate,” Villeroy said.

He believes that the risk that a recession in the euro area would force the central bank to stop raising interest rates is small because the labour market is still strong. “We can raise interest rates without creating significant unemployment,” Villeroy said. Moreover, according to him, energy plays a more important role in determining economic growth next year than the policy of the ECB. “Our goal is not to trigger a recession, but to tame inflation.”

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