Francois Villeroy de Galhau, a prominent policymaker at the European Central Bank (ECB), has raised concerns about the potential consequences of further interest rate hikes on the Eurozone economy. In a recent statement, Villeroy emphasized the need for caution, suggesting that the ECB should avoid pushing interest rates too high, which could result in a hard landing for the economy.
"The risk of doing too much – and possibly triggering a recession – and the risk of doing too little were now symmetrically balanced after the string of rate hikes," Villeroy stated.
He cautioned against the approach of "testing until it breaks" as an imprudent way to calibrate monetary policy.
Instead, Villeroy suggested a shift in focus towards the persistence of policy rather than constantly pushing interest rates higher. "This suggests that we should now focus on the persistence of policy rather than the constant pushing of rates higher – duration rather than level," he recommended.
Villeroy further stated, "The current level of interest rates was high enough to bring down inflation, and if markets fully reflected the ECB’s strategy, they should not expect rate cuts before 'a sufficiently long period of time."
Furthermore, Villeroy noted that the ECB's growing confidence in achieving its inflation target of 2 percent by 2025 allows them to also prioritize avoiding a hard landing in the economy.
"The bank forecasts inflation will hold above 3 percent next year and sees it below its 2 percent target only in the final quarter of 2025," he remarked.
Addressing concerns over rising oil prices, Villeroy emphasized that while the current rebound in oil prices differs from the general commodity price shock experienced in 2021-2022, it still necessitates careful monitoring.
"While the current rebound in oil prices was not a general commodity price shock as in 2021-2022, it needed to be monitored for the possible knock-on effect on inflation expectations and wages," Villeroy said.
As the ECB grapples with the delicate task of taming inflation while sustaining economic growth, Villeroy's remarks shed light on the nuanced decisions facing policymakers in the Eurozone. Balancing the risk of economic overheating against the dangers of a premature economic slowdown remains a key challenge as they chart their path forward.
By fLEXI tEAM