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The European Central Bank has broken the automatic link between winding down stimulus and raising interest rates — meaning it can now take as long as officials deem necessary before lifting borrowing costs from record lows, according to Governing Council member Francois Villeroy de Galhau.
The Bank of France chief — seen as a moderate on the 25-strong panel — said markets didn’t sufficiently acknowledge the change, announced on Thursday, with investors more focused on the plan to accelerate the conclusion of net asset purchases.
The move saw money markets bring forward bets on the first ECB rate hike to October from December. Italian bonds slumped.
“We’ll likely end asset purchases under certain conditions, but we’re saying the question of interest-rate hikes will come some time after,” Villeroy told BFM Business television on Friday. “That means it’s completely open, there’s no automatism, it could be a long time and we’ll take all the necessary time.”
It’s a sentiment that was echoed by Finland’s Olli Rehn, who said later Friday that the new guidance offers no signal on timing and that any action will be based on incoming economic data and developments in the war in Ukraine.
“There’s no change as regards earlier or later,” he told reporters in Helsinki. “Yesterday’s decision to my mind means we have more freedom to maneuver in monetary-policy decisions and I think this is the right course of action. It’s better to be safe than sorry.”
Commenting Friday in a blog post, Slovakia’s Peter Kazimir also stressed that any rate hike won’t be automatic. Portugal’s Mario Centeno said this week’s decision “did not change the medium-term outlook of monetary policy.”
The ECB is grappling with the challenge of sheltering the euro-area economy from the consequences of Russia’s invasion while also acting to contain record inflation. The “biggest risk” it’s facing right now is a repeat of the stagflation seen in the 1970s, according to former chief economist Otmar Issing.
Updated ECB forecasts, also released Thursday, show price growth easing to just below the 2% target through 2024. But the knock-on effects of Russia’s attack are still unfolding, with oil and natural gas prices jumping and trade disruptions also possible.
Villeroy called the ECB’s reaction on Thursday “measured and combative.”
“The only decision we took is to take our foot off the accelerator to avoid having to brake suddenly in the future.”
He also indicated the ECB is prepared to adjust bond-buying if there’s excessive divergence in the bond yields of euro-zone members.
“We’re ready, if necessary, if there were unjustified spreads between interest rates, to act more on assets of some countries or some asset classes,” Villeroy said.
(Updates with Kazimir, Centeno starting in seventh paragraph.)
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