ECB signals further rate hikes may be needed to curb euro zone inflation
Euro zone inflation pressures remain elevated after the European Central Bank left interest rates unchanged this week. Policymaker Fabio Panetta says additional tightening may still be required if price growth risks feeding into wages and longer-term expectations.
Highlights
- ECB kept rates unchanged but signaled a possible third rate hike this year to counter persistent inflation driven by higher fuel prices.
- Panetta indicated further rate increases may be necessary, as inflation is expected to stay above target for an extended period with upside risks.
- Panetta cautioned ECB to consider rising bond yields in its tightening, noting higher yields are raising borrowing costs and impacting Italy's fiscal outlook.
Policy outlook after ECB hold
As reported by Reuters, Panetta says the ECB may need to raise interest rates further to prevent high inflation from becoming entrenched and triggering a wage-price spiral. The central bank kept rates unchanged on Thursday but signalled that another increase, which would be the third this year, could come at its next meeting as officials respond to inflation driven higher by a war-related jump in fuel prices.In prepared remarks for an event in Rome, Panetta says monetary policy can and should stop price increases from becoming embedded in the expectations and behaviour of households and firms. He adds that, with inflation set to remain above target for an extended period and risks tilted to the upside, further increases in policy rates could prove necessary.
Bond yields and Italy's fiscal position
Panetta also strikes a more cautious note on the pace of tightening, saying the ECB should consider the recent rise in bond yields when gradually calibrating monetary policy. Higher market yields are already making borrowing more expensive, adding another layer of restraint for the economy.On Italy, Panetta says there is room for further upgrades to the country's credit rating, but he adds that the government should stay the course on prudent fiscal management. His comments underline the balance facing euro zone policymakers as they try to contain inflation without intensifying financial strains across heavily indebted member states.
In our earlier article on Mario Draghi’s policy warning, we examined the dilemma facing euro zone policymakers as interest rates rise: controlling inflation and debt without choking off the investment needed for long-term growth. The piece noted Draghi’s argument that central banks should keep rate paths no higher than necessary for price stability, because overly restrictive policy can raise borrowing costs, weaken productivity and intensify debt pressures.
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