The European Central Bank (ECB) may have further interest rate hikes to make, according to members of its monetary authority’s decision-making body. Despite differing opinions about the aggressiveness of the ECB, two central bank governors agree that more increases of key interest rates are yet to come due to persisting inflation in the eurozone. Banque de France Governor Francois Villeroy de Galhau said that the ECB still has a “little way to go” with interest rate hikes. The next decision is expected in early May, when policymakers will determine how much higher than 3% the deposit rate needs to be to bring inflation down to the 2% target.
Villeroy, who is a member of the ECB’s Governing Council, believes that most of the rate hiking has been done already and argues that the biggest impact will come from previous rate increases. He insists that the tightening can stop once inflation starts turning around. Austria’s Oesterreichische Nationalbank Governor Robert Holzmann, who also sits on the ECB’s Governing Council, told the German press that the eurozone’s monetary authority needs to keep raising interest rates. Holzmann revealed that there is a great deal of common understanding in the ECB Governing Council that they have not yet reached the end of interest rate hikes. He insists that the persistence of inflation currently argues for another 50 basis points.
Since July 2022, the ECB has raised interest rates by 350 basis points (bps) including three back-to-back 50 bps increases, but it has not provided any clear indication yet about the potential outcome of its upcoming meeting on May 4. Expectations for further rate increases were recently highlighted by two other members of the Council — the Governor of the Croatian National Bank, Boris Vujčić, and his colleague at the helm of Bank of Slovenia, Boštjan Vasle. Vasle acknowledged that core inflation is clearly on an upward trend, while Vujčić acknowledged that more hikes may follow.
Inflation in the eurozone is the main driver behind the interest rate hikes. The ECB’s target inflation rate is 2%, but it has been above this level for several years. Core inflation, which excludes volatile items like food and energy, rose to 1.4% in March from 1.1% in February. The ECB has been trying to bring inflation down to its target by raising interest rates. However, higher interest rates can lead to slower economic growth and lower inflation. As a result, the ECB has been cautious about raising rates too quickly.
The ECB’s interest rate decisions affect the cost of borrowing money for banks, which in turn affects the cost of borrowing for businesses and individuals. Higher interest rates make borrowing more expensive, which can slow down economic growth. Lower interest rates make borrowing cheaper, which can stimulate economic growth. The ECB’s interest rate decisions also affect the value of the euro. Higher interest rates can make the euro more attractive to investors, which can increase its value. Lower interest rates can make the euro less attractive to investors, which can decrease its value.
The ECB’s Governing Council is made up of the six members of the Executive Board and the governors of the national central banks of the 19 eurozone countries. The Council meets every six weeks to discuss monetary policy. The ECB’s President, Christine Lagarde, chairs the meetings and presents the ECB’s economic analysis and policy proposals. The Council then discusses the proposals and makes decisions by consensus. The ECB’s decisions are communicated to the public through press releases and speeches by ECB officials.
In conclusion, the ECB may have further interest rate hikes to make due to persisting inflation in the eurozone. Banque de France Governor Francois Villeroy de Galhau and Austria’s Oesterreichische Nationalbank Governor Robert Holzmann both agree that more increases of key interest rates are yet to come. The ECB’s next decision is expected in early May, when policymakers will determine how much higher than 3% the deposit rate needs to be to bring inflation down to the 2% target.