The European Central Bank (ECB) is on the path of monetary tightening, but according to influential Governing Council members, there is still some distance to cover before borrowing costs can be raised to desired levels. Maintaining high interest rates for an extended period is crucial to effectively manage inflation, ensuring it remains under control. As two members of the Governing Council, Pablo Hernandez de Cos and Francois Villeroy de Galhau, express their views on the matter, it becomes evident that consensus is building around the need for sustained restrictive measures to bring consumer-price growth in line with the ECB’s target.
In a recent statement made in Barcelona, Pablo Hernandez de Cos, the head of Spain’s central bank and a member of the ECB’s Governing Council, stressed that although the process of monetary tightening has made considerable progress, there is still some way to go (source). The available information suggests that interest rates must remain in restrictive territory for an extended period to achieve the central bank’s inflation target in a sustained manner. De Cos’s remarks reflect a growing consensus among policymakers that the borrowing costs, irrespective of reaching their peak, need to be kept high.
Similarly, Francois Villeroy de Galhau, a fellow member of the Governing Council and the chief of the Bank of France, predicts that the ECB will reach its peak in interest rates within the next three meetings (source). However, Villeroy emphasizes that reaching the terminal rate does not necessarily mean a rate hike at each meeting. He further stresses the importance of maintaining borrowing costs at the peak level for a certain period, enabling policymakers to evaluate the impact of the extensive monetary tightening measures implemented so far.
Villeroy’s recent speech at the National Association for Business Economics symposium in Paris reinforces the notion that the ECB is already in restrictive territory. He describes the rate-hiking journey as mostly completed, with the central bank now clearly operating in restrictive territory. Villeroy points out that there are three possible scenarios for the Governing Council: either continuing to hike rates or pausing temporarily.
These insights from prominent ECB policymakers highlight the delicate balance the central bank must strike to achieve its inflation target. While monetary tightening is progressing, caution is warranted to ensure that the impact of previous measures is thoroughly assessed.