PARIS (Reuters) – The European Central Bank has reached the point where it needs to be wary of raising interest rates too high and should try to avoid a hard landing of the economy, ECB policymaker Francois Villeroy de Galhau said on Monday.
The ECB raised its main interest rate to a record high 4% this month after 10 successive hikes, but signalled a pause in October.
Nonetheless, some policymakers have since indicated a hike is still possible in the face of stubbornly high euro zone inflation, which at 5.2% in August remains well above the ECB’s 2% target.
Villeroy said that the risk of doing too much – and possibly triggering a recession – and the risk of doing too little were now symmetrically balanced after the string of rate hikes.
If the ECB did too much, the central bank could run the risk of having to rapidly reverse course, he told a conference at the French central bank, which he also heads.
“Hence, ‘testing until it breaks’ is not a sensible way to calibrate monetary policy,” he said.
“This suggests that we should now focus on the persistence of policy rather than the constant pushing of rates higher – duration rather than level.”
Villeroy said that the current level of interest rates was high enough to bring down inflation and that if markets fully reflected the ECB’s strategy, they should not expect rate cuts before “a sufficiently long period of time”.
He said that ECB policymakers’ growing confidence in achieving their objective of reducing inflation to 2% by 2025 meant that they could now also aim to avoid a hard landing in the economy.
The bank forecasts inflation will hold above 3% next year and sees it below its 2% target only in the final quarter of 2025.
While the current rebound in oil prices was not a general commodity price shock as in 2021-2022, it needed to be monitored for the possible knock-on effect on inflation expectations and wages, Villeroy said.
(Reporting by Leigh Thomas; Editing by Toby Chopra)
