By Francesco Canepa
FRANKFURT, Sept 18 (Reuters) – Market bets on further European Central Bank rate hikes are being driven largely by higher energy prices but policymakers will look at a much wider set of economic indicators when deciding their next moves, ECB Vice President Boris Vujcic told Reuters.
Investors have been ramping up their expectations for ECB rate hikes since the euro zone’s central bank increased borrowing costs last week as a widening conflict in the Middle East pushed up the cost of fuel for the bloc.
Vujcic, a member of the ECB Governing Council, appeared to pour water on those wagers, cautioning against zooming in on oil-and-gas prices as the sole drivers of monetary policy.
“The pricing of the interest rate path is being driven mainly by rising energy prices,” he said in an interview conducted on Wednesday.
“What I want to emphasise is that we do not look solely at energy prices, but at a much broader set of data and criteria when making monetary policy decisions. It would not be advisable to focus exclusively on energy prices, however important they are.”
RESILIENT ECONOMY FACES SOME RISKS
Vujcic, who was governor of Croatia’s central bank before becoming ECB vice-president in June, said persistently high energy prices would not only push up inflation but could also weaken economic growth by squeezing household incomes and spending.
“If inflation remains high through the autumn and affects household incomes and consumer behaviour, that will also have a dampening impact on GDP,” he said.
A cold winter would compound that hit by raising heating bills, Vujcic added.
At the same time, he noted that the euro zone had reduced its reliance on natural gas in the past four years, making low storage levels less of a threat than when Russia invaded Ukraine in 2022.
And the economy had proven more resilient than expected thanks to exports – where buyers had likely brought forward some purchases – and private consumption, which was expected to remain “reasonably solid”, Vujcic added.
A PACE WORTH MAINTAINING
The ECB raised its policy rate from 2.0% to 2.50% in two steps in June and September along with updated quarterly projections, a pace that Vujcic said was worth maintaining “for the time being”.
“We will see what happens in the coming months and adjust policy accordingly,” he added.
Money markets price another three or four hikes by the end of next year, with the next one possibly coming as soon as October. That would raise the deposit rate to 3.25% or 3.50%.
The ECB has described a rate of more than 2.50% as restrictive, that is curbing economic growth.
Vujcic said the ECB should not focus too much on such labels but “assess what level of interest rates is appropriate at a given point”.
He also opened the door to raising bank reserve requirements as a means of draining some liquidity, a legacy of the stimulus policies of the last decade that is costing central banks in the euro area billions of euros in interest payments every year.
“When you create excess liquidity, particularly as large as we did in the past, reserve requirements allow you to sterilise part of it in a simple and inexpensive way,” he said.
He said he preferred this tool to alternatives such as charging fees or reviving a “complicated” tiered rate, under which some deposits are not remunerated.
BOND MARKET SIGNALS NEED FOR FISCAL PRUDENCE
Bond yields across the world have scaled highs not seen since before the financial crisis on the back of higher expectations for inflation and interest rates as well large borrowing needs from governments and tech companies.
Vujcic said the moves did not pose a threat to financial stability because euro zone banks are well capitalised and stocked with liquidity.
But he added that governments should keep public finances under control.
“Over time, if inflation expectations come down, we could see a repricing, but responsible fiscal policy from governments remains an essential part of the puzzle in the long run,” he said.
(Reporting by Francesco Canepa; Editing by Susan Fenton)
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