ECB Vice President intervenes to "cool things down": Rising energy prices cannot be the sole reason for continuing interest rate hikes.

European Central Bank Vice President Boris Vujcic downplayed the role of rising energy prices in driving expectations of further interest rate hikes, emphasizing that monetary policy should not be judged solely based on changes in oil and gas prices, but should comprehensively assess broader data such as inflation, economic growth, and household consumption.

On September 18, Reuters reported that Vujcic stated on Wednesday that the market's pricing in the ECB's future interest rate path is "primarily driven by rising energy prices," but using energy prices as the sole driver of monetary policy is "not advisable." Following the Middle East conflict which pushed up fuel costs, investors have further bet on subsequent tightening since the ECB's rate hike last week.

Currently, the money market expects the ECB to raise interest rates three to four more times before the end of next year, possibly as early as October, at which point deposit rates will rise to 3.25% to 3.50%. Vujcic's statement implies that the market's pricing of the interest rate hike path still depends on future economic data.

Energy prices are impacting both inflation and growth, and interest rate hikes will still depend on economic performance.

Vujcic points out that persistently high energy prices will not only push up inflation but may also drag down economic growth by squeezing household income and consumption. If inflation remains high in the fall and affects household consumption, GDP will also be suppressed; if a severe winter pushes up heating costs, this impact could be further exacerbated.

However, compared to the early stages of the Russia-Ukraine conflict in 2022, the Eurozone's dependence on natural gas has decreased significantly, so the risks posed by current low gas storage levels are relatively limited. Vujcic stated that the Eurozone economy has also demonstrated greater resilience than expected, with exports and private consumption continuing to provide support, the latter expected to remain "quite robust."

The ECB has raised interest rates twice, in June and September, increasing the policy rate from 2.0% to 2.50%. Vujcic believes that the current pace of rate hikes is "worth maintaining" for now, and that policy will be adjusted based on data from the coming months. He stated that rather than debating whether rates above 2.50% constitute "restrictive" interest rates, it is more important to assess what interest rate level is most appropriate for a given period.

Furthermore, Vujcic believes that raising the bank reserve requirement ratio can serve as a tool to absorb excess liquidity. The massive excess liquidity accumulated over the past decade of loose monetary policy has resulted in billions of euros in interest costs for central banks across the Eurozone each year. He prefers to offset some of the liquidity by raising reserve requirements rather than imposing fees or reintroducing complex tiered interest rate mechanisms.

Regarding the continued rise in global bond yields, Vujcic believes that it does not currently pose a significant threat to financial stability, as Eurozone banks remain well-capitalized and liquid. However, he cautions that governments must maintain fiscal discipline. Over time, if inflation expectations subside, the bond market may repric; in the long term, responsible fiscal policy remains a crucial component of maintaining financial market stability.

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