According to two of the top ECB policymakers, letting inflation remain high would be even more painful, so the ECB will keep raising borrowing costs even as the euro zone economy struggles.
In order to return double-digit inflation in the euro zone to its 2% target, the ECB has been raising interest rates at a record pace and encouraging investors to expect future increases.
Both Bundesbank President Joachim Nagel and ECB Vice President Luis de Guindos stated that this had costs in terms of economic growth.
“I will … do my utmost to ensure that we, the Governing Council of the ECB, do not let up too early and that we continue to push ahead with monetary policy normalization – even if our measures dampen economic development,” Nagel told a German banking conference, adding large rate hikes were necessary.
“Because in a situation where monetary policy gets behind the curve, the overall economic costs would be significantly higher,” Nagel said.
The ECB’s policy, continued De Guindos, “will reduce aggregate demand, both consumption and investment, but it’s the only possible way forward because doing nothing would be much worse.”
This winter, the economy of the euro zone is anticipated to contract due to a combination of increasing energy prices, weaker global demand, and rising borrowing costs.
De Guindos and Nagel agreed that the ECB should reduce its multi-trillion euro bond holdings, which were amassed during the previous decade’s period of too-low inflation.
The so-called quantitative tightening, according to De Guindos, must be carried out “with great caution,” but it may begin while the ECB is still raising interest rates.
“The characteristics and the timing of our QT, which may overlap or not with the process of normalising the interest rates, will be discussed in December,” de Guindos said. “Personally, I don’t see any sort of sequencing here.”
Markets anticipate that the ECB will keep raising interest rates through the middle of next year, reaching a peak rate of about 3% from its current level of 1.5%.
(Adapted from Latestly.com)