FRANKFURT (Dow Jones)–ECB Council member Francois Villeroy de Galhau spoke out in favor of a significant increase in key interest rates by the European Central Bank (ECB) in September. At the monetary policy symposium in Jackson Hole, he said the ECB must raise interest rates to neutral levels, which could be done by the end of the year if the ECB hikes rates “significantly” in September, according to a Bloomberg report.
In the run-up to the forthcoming Council meeting, ECB Director Isabel Schnabel spoke in private for an interest rate hike of 50 basis points, while ECB Director Fabio Panetta warned against excessive rate hikes and some unnamed “hawks” announced, according to a report by the Reuters news agency, that they intend to to discuss a rate hike of 75 basis points.
Contrary to its own forward guidance, the Governing Council of the ECB raised interest rates by 50 basis points in July and at the same time dropped the guidance that an interest rate hike of more than 25 basis points in September could be justified.
Villeroy de Galhau said: “We can take a gradual approach, but we should not be too slow and delay normalization until higher inflation expectations force us to aggressively raise interest rates. However, it is important that we act in an orderly manner to avoid undue volatility in markets and ultimately the economy to avoid.”
The governor of the Banque de France also held out the prospect of discussions about changing the deposit rate for banks. Paying interest on deposits would bring significant risk-free income to the banking system and a similar loss to the Eurosystem, according to Villeroy, the former could jeopardize monetary policy transmission. “We need to think about a reserve remuneration system adapted to this new context,” he said. “We will conduct this assessment in a timely and pragmatic manner, taking into account different options that have existed throughout history and in different countries.”
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(END) Dow Jones Newswires
August 27, 2022 13:19 ET (17:19 GMT)
