ECB Internally Debates the Endpoint of Rate Hikes: Economists Expect a "Final Hike" in December, Officials Say Rates Are Near Restrictive Territory

ECB Governing Council member Primoz Dolenc said tightening financial conditions may reduce the need for the ECB to take monetary policy action. Speaking in an interview on the sidelines of the International Monetary Fund (IMF) annual meetings, he said, "We have seen quite a bit of repricing in the market," and "if financial markets tighten, then maybe we don't have to do as much as we otherwise would." After two rate hikes, policymakers are debating how much more rates need to rise to bring inflation, which is approaching 4%, back to target. September price pressures were stronger than expected, and the economy proved more resilient than imagined. Economists expect the ECB to deliver a final rate hike in December, taking the deposit rate to 2.75% a level some estimate will begin to restrain economic activity. Asked about that outlook, Dolenc said the ECB is "approaching restrictive territory maybe not fully there yet, but at the edge." ECB Governing Council members Pierre Wunsch, governor of the Belgian central bank, and Gediminas Simkus, governor of the Lithuanian central bank, each stressed the latest inflation data in interviews, arguing that further tightening may still be needed. The latter said that although the December move will be based on more data, action this month cannot be ruled out either. "Our situation is that second-round effects have not yet appeared, or have not yet clearly appeared," Dolenc said, echoing similar remarks earlier this week by Simkus and ECB President Christine Lagarde. Bank of Portugal Governor Alvaro Santos Pereira said separately that "the good news is that so far inflation in Europe has not spread," adding that he has "no doubt" the ECB will achieve its price target. Any decision will be complicated by investor concerns about the fiscal positions of France and other highly indebted euro-area member states. France led a recent bond market selloff, pushing 10-year government bond yields to levels not seen in nearly a quarter of a century. Bank of France Governor Emmanuel Moulin argued that higher sovereign borrowing costs are putting pressure on financial conditions, potentially dampening demand and also inflation. Meanwhile, economists and investors are speculating about how much market conditions would need to deteriorate before the ECB would be willing to intervene. "We have different monetary policy measures in our toolbox, including even the Transmission Protection Instrument (TPI)," Dolenc said. "If necessary and if conditions are met, they will be used, or may be used. At present it is hard to speculate when, how and why different tools will be used." Austrian central bank Governor Martin Kocher agreed. "It would be disadvantageous to pre-commit," he said. "The ECB has a toolbox. The toolbox allows for quite a lot of tools, and I think we are not yet at the stage where we need to discuss any of them. But if needed, they are there." Kocher also stressed that some ECB watchers have suggested quantitative tightening (QT) could be paused to remove a source of market pressure, but QT is "actually gradual." "It is passive and very predictable," he said. "Whether there could be any developments in bond prices and bond yields in the market that would require adjusting this policy we don't know." Lagarde herself, who is French, kicked the ball to President Emmanuel Macron's government, encouraging politicians to work on reducing a deficit that has soared to nearly twice the ceiling allowed under EU rules. But she also recently told a group of finance ministers that the ECB has tools to respond to the situation if necessary. In Europe, the United States and elsewhere, rising government borrowing costs were a major topic at the Bangkok meeting of global financial officials. IMF Managing Director Kristalina Georgieva last week called on policymakers to take urgent action to reduce high debt and budget deficits.