Receding concerns over the health of the financial system mean a half-point increase in interest rates is possible when the European Central Bank meets next month, according to Governing Council member Bostjan Vasle.
(Bloomberg) — Receding concerns over the health of the financial system mean a half-point increase in interest rates is possible when the European Central Bank meets next month, according to Governing Council member Bostjan Vasle.
The turmoil ignited by the failure of Silicon Valley Bank “seems contained” — meaning the euro-zone economy is now roughly in the same position as it was before the problems arose, the Slovenian central-bank chief said this week in an interview in Washington.
“We have to continue raising interest rates,” Vasle said on the sidelines of the International Monetary Fund’s spring meetings.
“The options for May are between 25 and 50 basis points. It’s not necessary to decide now already as the size of the next step will depend on the data — including on bank lending, growth and inflation,” he said.
While a growing number of officials say the most intense bout of monetary tightening in ECB history will soon draw to an end, how much is still required to return inflation to the 2% goal is up for discussion.
With the banking stress threatening to curb credit flows, economic expansion and inflation, investors have trimmed bets on the peak in the ECB’s deposit rate — currently 3% — to 3.75%. In the US, too, there’s talk of hikes halting soon.
Some ECB policymakers, however, reckon maintaining the recent tightening pace is warranted, given that core inflation — which strips out volatile components like food and energy — hit another record last month.
Robert Holzmann, the hawkish head of Austria’s central bank, on Wednesday backed a fourth straight half-point move next month.
Other officials agreed that tightening must continue. But with data on economic activity, inflation and bank lending due before May’s meeting, most are keeping an open mind on next steps.
“There’s still a way to go” on monetary policy, Bundesbank President Joachim Nagel told journalists Thursday. Before settling on what to do next, it’s “absolutely appropriate” for officials to wait and see whether financing conditions are further tightened as a result of banking stress, he said.
Madis Muller, who heads Estonia’s central bank, told Bloomberg that next moves will be based on a broad assessment of the economy, while financial-sector tensions alone are unlikely to throw the ECB off course.
“There’s no reason for us to assume at this point that the banking turmoil in the US and Switzerland is changing the outlook for the euro area,” he said. “We have to be vigilant, but at this point there’s no reason to change our monetary-policy path because of it.”
That means “unless an unexpected risk materializes, we still have some way to go to increase interest rates,” Muller said. At the same time, “it’s too early to say how far we need to go and what exactly we should do in May.”
Vasle highlighted the resilience of Europe’s economy.
“Growth momentum is better than expected,” he said. “Labor markets are also very strong. We haven’t seen everything on wage growth yet.”
Whether the financial-sector tensions — which culminated with UBS Group AG’s takeover of Credit Suisse Group AG — will compound the effect of higher interest rates by curbing banks’ willingness to lend will be important to watch, according to Vasle.
Such an outcome would support a slowdown in the pace of rate increases to 25 basis points, he said, though there’s so far little evidence of that happening.
“It’s difficult to disentangle the impact of tighter monetary policy from concerns about the banking sector,” Vasle said. “But the impact of the Credit Suisse situation on bank lending in the euro area is probably marginal.”
A “turnaround in underlying inflation dynamics” could also lead to a smaller rate increase in May, he said.
(Updates with comments from Nagel, Muller starting in ninth paragraph.)
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