JACKSON HOLE: The European Central Bank (ECB) needs another significant interest rate hike in September and should hit the “neutral” level before the end of the year, French central bank chief Francois Villeroy de Galhau said on Saturday.

The ECB raised rates by 50 basis points to zero in July to fight inflation that is now approaching double-digit territory and another such move is now fully priced in by financial markets.

Considered a centrist on the bank’s rate-setting Governing Council, Villeroy said that rates should keep rising until the ECB hits the neutral level, which is somewhere between 1 per cent and 2pc. At the neutral rate, the central bank neither stimulates nor holds back growth.

“We could be there before the end of the year, after another significant step in September,” Villeroy told the US Federal Reserve’s Jackson Hole Economic Symposium.

While markets have been betting on a 50 basis point move in September, several ECB policymakers, including Dutch central bank chief Klaas Knot and Austria’s Robert Holzmann, have said that 75 basis points should also be part of the discussion.

Villeroy said the ECB was willing to go higher than the neutral level, if needed.

“Have no doubt that we at the ECB would if needed raise rates further beyond normalisation: bringing inflation back to 2pc is our responsibility; our will and our capacity to deliver on our mandate are unconditional,” he added.

Specific forward guidance, as provided for years, is now viewed as unadvisable given global economic uncertainties.

Published in Dawn, August 28th, 2022

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