(Oct 15): A tightening in financial conditions may limit the need for European Central Bank monetary policy action, according to Governing Council member Primoz Dolenc.
“We’ve seen quite a bit of repricing in the markets,” Dolenc told Bloomberg Television in Bangkok, where he’s attending the International Monetary Fund’s annual meetings. “If there is a tightening on the financial market, then maybe we don’t have to do as much as we would otherwise.”
After two hikes, policymakers are debating how much further interest rates will have to rise to return an inflation rate approaching 4% back to their target. Price pressures turned out stronger than expected in September, while the economy has proven more resilient than thought.
Economists are anticipating a final move in December, which would take the deposit rate to 2.75% — a level estimated by some to start restraining economic activity.
Asked about that prospect, Dolenc said that the ECB is “approaching the restrictive area — probably we are still not there, but we are on the limits.”
Governing Council members Pierre Wunsch and Gediminas Simkus — from Belgium and Lithuania, respectively — both highlighted the latest inflation data when arguing in separate Bloomberg interviews that more tightening will probably be needed. While a move in December would be based on more data, action this month can’t be excluded, the latter said.
“We have the situation that second-round effects are not visible or not visible yet,” Dolenc said, echoing similar comments from Simkus and ECB president Christine Lagarde earlier this week.
Any decision will be complicated by investor concerns about the fiscal situation in France and other highly indebted members of the 21-nation euro zone. The country led a recent bond-market selloff that propelled the 10-year yield to highs not seen in almost a quarter century.
Bank of France governor Emmanuel Moulin argued that higher sovereign borrowing costs are putting pressure on financial conditions, potentially damping demand — as well as inflation.
Meantime, economists and investors are speculating how much worse the market situation needs to get before the ECB would be willing to step in.
“We have different monetary policy measures in our toolkit, even TPI,” Dolenc said. “They will be used or they would be used if necessary if the conditions are met. It’s really difficult to speculate right now when, how, and why different kind of tools will be used.”
Martin Kocher, who heads Austria’s central bank, agrees.
“It would be bad to pre-commit,” he said. “There’s a toolbox of the ECB. The toolbox allows for quite a lot of instruments, and I think we are not at the stage where we need to discuss any of these instruments. But they are there if they are needed to be used.”
Kocher also highlighted that quantitative tightening, which some ECB watchers have suggested could be halted to remove a source of market pressure, is “actually gradual.”
“It’s passive and very predictable,” he said. “Might there be any kind of developments out on the markets in terms of bond prices and bond yields that need adjustments of this policy? We don’t know.”
Lagarde, a Frenchwoman herself, put the ball in the court of President Emmanuel Macron’s government, encouraging politicians to work on reducing a deficit that’s spiralled to nearly twice the ceiling allowed by European rules. But she also told a group of finance ministers recently that the ECB has the instruments to deal with the situation if needed.
Rising government borrowing costs across developed economies in Europe, America and elsewhere are a major theme at the Bangkok gathering of global finance officials. IMF chief Kristalina Georgieva called on policymakers last week to take urgent action to reduce high debts and budget deficits.
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