On Thursday (October 12th), European Central Bank policymakers expressed cautious optimism that even without further interest rate hikes, inflation rates would return to 2%, and put pressure on governments to maintain a soft landing for their economies.
The European Central Bank raised its key interest rate to a record 4.0% last month, but stated that due to the economic slowdown and the possibility of even falling into recession, the 10th rate hike in the 14 month long effort by the European Central Bank to reduce inflation may be the last, at least for now.
Francois Villeroy de Galhau, the governor of the French central bank, and Yannis Stournaras, the governor of the Greek central bank, have joined a long list of policy makers who are currently suggesting stabilizing interest rates. They both plan to reduce the need for further tightening, believing that policies are already in an environment that can reduce inflation.
These remarks come as the minutes of the last meeting released by the European Central Bank on Thursday showed that even the last rate hike was a close call.
The European Central Bank said, "If a last-minute mistake is made in the first decision to suspend, it may be interpreted as a weakening of the ECB's determination, especially when overall and core inflation rates are above 5%
Although most people support raising interest rates, there has also been a shift in risk perception. Policy makers believe that inflation risks are more balanced, and there is also a greater balance between the costs of tightening too much and too little.
The European Central Bank's model also indicates that if the European Central Bank maintains this level for a sufficient period of time, deposit rates between 3.75% and 4.00% may lead to inflation returning to 2%.
Due to record high interest rates and declining inflation, policymakers seem to be shifting their attention to growth, the possibility of recession, and fiscal issues.
If we can take a monetary path that ensures a soft landing... it would be a better path for our compatriots, "Vileruva said
At the same time, Stonaras pointed out that since the last policy meeting of the European Central Bank, borrowing costs have increased due to rising bond yields. Therefore, he questioned whether further tightening of policies is necessary, whether it is to reduce bond purchases or increase bank fees.
The high borrowing costs are a particular risk for Italy, as investors believe that the country is particularly vulnerable due to its high budget deficit, high debt, and lack of fiscal discipline.
Sturnalas downplayed concerns about Italy, but also opposed the early reinvestment of the European Central Bank's 1.7 trillion euro (1.8 trillion US dollars) emergency purchase plan for the pandemic, which is its first line of defense against the sharp rise in borrowing costs.
Stonaras added, "The current situation in Italy has not raised any special concerns
Since the last meeting of the European Central Bank, long-term bond yields have risen significantly as investors are preparing for an era where budget deficits remain large and central bank purchases are reduced or not made - which could cause headaches for large borrowers such as Italy.
Due to Federal Reserve officials downplaying the need for further interest rate hikes in the United States and nervousness over the wider spread of the conflict between Israel and Hamas in the Middle East, borrowing costs have slightly decreased this week.
The Governor of the Slovenian Central Bank, Bostjan Vasle, said: "This change in interest rate differentials to some extent reminds governments that coordination between fiscal and monetary policies is necessary
Vassler said, "Fiscal discipline is needed to protect interest spreads." He referred to the high fees that the country must pay for borrowing.
