Having raised rates at the fastest pace on record in the past year, the ECB is now debating whether to slow down rate hikes, and policymakers are contemplating just how much higher the 3% deposit rate needs to go to get inflation back down to 2%.
"We may possibly still have a little way to go on rate hikes at our next meetings, though I think it premature to decide now what we will do in May," Villeroy said in a speech in Washington. "We have already completed most of our rate-hiking journey and the strongest economic effect ahead of us will be the pass-through of what is already in the pipe," Villeroy, who sits on the ECB's 26-member Governing Council, said. Markets see another 75 basis points of rate hikes by September but investors are split whether that would be done in two or three steps. While a 25 basis point increase is fully priced in for May 4, bets for a larger increase have been rising in recent days.
Villeroy also argued that the ECB can stop tightening policy
once underling inflation starts turning around.
"A turnaround in the trajectory of underlying inflation – be
it actual or expected with sufficient certainty –, should be a
trigger for stabilising our rates," he said.
Villeroy also played down the significance of just how much
hiking is still left to be done, arguing that the biggest impact
will be from rate increases already done.
"The deferred effect of our past rate hikes will be more
significant than the one of our future decisions," Villeroy
said. "For interest rates as with ballistics, 'longer' is
becoming more significant than 'higher'.
The ECB has said that once rates peak, they will stay there
for some time but the formulation of this duration has been
vague, leaving investors to guess the bank's intentions.
(Reporting by Balazs Koranyi; editing by John Stonestreet)
