© Reuters. FILE PHOTO: Francois Villeroy de Galhau, Governor of Banque de France, attends the Paris Europlace International Financial Forum in Paris, France, July 12, 2022. REUTERS/Benoit Tessier
PARIS (Reuters) -The European Central Bank interest rates are likely to reach their peak over the summer and a rate cut this year is out of the question, French ECB policymaker Francois Villeroy de Galhau said on Friday.
In an effort to steer record inflation towards its 2% target, the ECB has hiked rates by a combined 300 basis points to 2.5% since last July and promised to deliver a further 50 basis point increase in March.
In a speech to financial analysts, Villeroy, who is also governor of the French central bank, said that rates would then “probably” reach their peak in the summer, at the latest by September.
Markets took the ECB’s February policy statement as a signal that rates could peak at a lower level than earlier thought and investors quickly priced out a 25 basis point rate hike.
Subsequent pushback by a plethora of policymakers reversed market moves, however, and the terminal rate is now seen around 3.75%, suggesting another 125 basis points of rate hikes, including the 50 basis point move in March.
Villeroy said that how long interest rates are kept at the peak were also key, adding that they would be kept high as long as necessary to steer inflation back towards the ECB’s 2% target.
He said that the question of when rate cuts could come lay further in the future and was “surely not for this year”. He added that it would depend on not only on overall inflation coming down, but also underlying inflation, which excludes volatile items like energy prices.
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The European Central Bank’s (ECB) President, Christine LeGarde, has stated that interest rate levels are likely to remain at their current levels through this summer and stay as is until further notice.
Speaking during a press conference following the central bank’s policy meeting on Thursday, Ms. LeGarde said that while there is “room for more” stimulus measures, such as monetary policy rates must stay at the 0% level they are presently.
In what has been seen as a message of caution to European governments, the president added “It would be dangerous if we stopped focusing on our monetary policy. We cannot take on a fiscal responsibility if governments don’t take their economic responsibility too.”
In addition to keeping interest rate levels as is, Mr. LeGarde said the ECB will discuss other options such as asset purchases to inject liquidity into the market to ensure its financial stability.
The ECB’s message comes as the European region’s economic recovery depends on economic ingenuity and government measures such as fiscal stimulus, she said.
ECB chief economist François Villeroy de Galhau, who joined the press conference, echoed Mr. LeGarde’s sentiments and said “While we recognize the importance of fiscal policies, it would be wrong to rely on them alone, and there is a role for monetary policy to play.”
Mr. Villeroy de Galhau stated that further guidance will come as the European Union begins to adopt its new legislative and legal framework, as well as take measures to finalize a landmark €750 billion Covid-19 recovery package.
He additionally noted that it was likely the ECB would remain at its current maximum level of deposits and that no further rate cuts would be made this year.
This sentiment has been echoed by the European Commission, which recently said that it expects recovery from the coronavirus pandemic to be “slow and patchy in the Euro area,” and that quantitative easing should remain in place through at least mid-2021.
In conclusion, it appears that the ECB intends to keep interest rate levels in check for the foreseeable future, as it further assesses the effects of economic stimulus measures enacted by European governments.
