Mar 22, 2023
ECB Officials Viewing Inflation Threat Feel Vindicated on Hike
(Bloomberg) -- European Central Bank officials are growing increasingly confident that the euro-zone banking system has withstood financial turmoil, allowing them to envisage resuming interest-rate hikes in due course, according to people with knowledge of the matter.
Policymakers consider themselves vindicated after they followed through on their 50 basis-point hike last week despite global market volatility, said the people, who declined to be identified because ECB deliberations are confidential.
Officials are currently more concerned about unvanquished inflation than any damage to economic growth from recent turbulence, though they’re not complacent and are looking anxiously at the US for sign of further contagion from the failure of regional banks there, the people said.
An ECB spokesperson declined to comment on the prospects for monetary policy.
The insight gives a glimpse into sentiment on the Governing Council three days after jitters in the wake of Credit Suisse Group AG’s arranged takeover in Switzerland prompted further volatility. It’s also instructive just hours before the US Federal Reserve judges whether to keep raising rates so soon after the outbreak of market turmoil.
On Wednesday, ECB President Christine Lagarde reiterated the position she outlined with the policy decision last week, insisting that if the “baseline” holds, then there will be more “ground to cover” with monetary policy. Officials are neither committed to raising rates further, nor are they finished hiking, she said.
“I have made clear that there is no trade-off between price stability and financial stability,” Lagarde reiterated, observing that “we do not see clear evidence that underlying inflation is trending downwards.”
Money markets have almost baked in a quarter-point hike in May, a far cry from as recently as Monday when less than 5 basis points of tightening was expected. Wagers on the peak have also been bolstered, pricing a terminal rate close to 3.5% in July.
Financial markets have continued to function in the eurozone. Money markets haven’t seized up, government-bond markets show no signs of fragmentation, and the euro has remained robust, while bank debt and shares have recovered some ground lost in the past week.
That has reassured some policymakers. Bundesbank President Joachim Nagel, one of the ECB’s hawks, told the Financial Times in an interview released earlier that “there’s still some way to go.”
He also said that once the ECB stopped hiking it would then have to resist calls to cut rates, as doing so would enable “inflation to flare up again.”
“If we are to tame this stubborn inflation, we will have to be even more stubborn,” he said.
--With assistance from Nicholas Comfort and James Hirai.
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