Market bets on further European Central Bank rate hikes are largely being driven by higher energy prices, but policymakers will look at a much broader set of economic indicators when deciding their next moves, ECB Vice President Boris Vujcic said.
Investors have ramped up expectations for ECB rate hikes since the euro zone's central bank increased borrowing costs last week, a move prompted in part by a widening conflict in the Middle East pushing up fuel costs across the bloc. Vujcic, a member of the ECB Governing Council, appeared to cool those wager, cautioning against treating oil-and-gas prices as the sole drivers of monetary policy.
"The pricing of the interest rate path is being driven mainly by rising energy prices," he said. "What I want to emphasise is that we do not look solely at energy prices, but at a much broader set of data and criteria when making monetary policy decisions. It would not be advisable to focus exclusively on energy prices, however important they are."
Vujcic, who was governor of Croatia's central bank before joining the ECB Governing Council in June, said persistently high energy prices would not only push up inflation but could also weaken economic growth by squeezing household incomes and spending.
"If inflation remains high through the autumn and affects household incomes and consumer behaviour, that will also have a dampening impact on GDP," he said. A cold winter would compound that hit by raising heating bills, he added.
On the other hand, Vujcic noted that the euro zone had reduced its reliance on natural gas over the past four years, making low storage levels less of a threat than when Russia invaded Ukraine in 2022. The economy had also proven more resilient than expected, supported by exports — where buyers appear to have brought forward some purchases — and private consumption, which he expected to remain "reasonably solid."
The ECB raised its key policy rate from 2.0% to 2.50% in two steps in June and September, alongside updated quarterly projections. That pace was worth maintaining "for the time being," Vujcic said. "We will see what happens in the coming months and adjust policy accordingly."
Money markets are pricing in another three or four hikes by the end of next year, with the next one possibly coming as soon as October and potentially lifting the deposit rate to 3.25% or 3.50%. The ECB has described a rate above 2.50% as restrictive — meaning it curbs economic growth — but Vujcic said the central bank should not focus too heavily on such labels and should instead assess what level of interest rates is appropriate at any given point.
He also opened the door to raising bank reserve requirements as a means of draining excess liquidity left over from a decade of stimulus policies that now cost euro-area central banks billions in interest payments annually.
"When you create excess liquidity, particularly as large as we did in the past, reserve requirements allow you to sterilise part of it in a simple and inexpensive way," he said, adding that he preferred this tool to alternatives such as charging fees or reviving a tiered deposit system.
Bond yields across the world have reached levels not seen since before the financial crisis, pushed higher by rising inflation expectations, interest rate forecasts and large government borrowing needs. Vujcic said the moves did not pose a threat to financial stability because euro-zone banks are well capitalised and stocked with liquidity. But he warned that governments should keep public finances under control.
"Over time, if inflation expectations come down, we could see a repricing, but responsible fiscal policy from governments remains an essential part of the puzzle in the long run," he said.
