Is the ECB Ending Tightening or Going Its Own Way? The Emerging Core Inflation Variable

[Image source=EPA Yonhap News]

As the United States suppresses inflation through high-intensity tightening, consumer prices dropped last month, raising expectations for an end to tightening and drawing attention to the future interest rate path of the European Central Bank (ECB). While the prevailing view is that the ECB will raise rates again at the monetary policy meeting on the 4th of next month, internal voices differ on the size of the hike and the timing of the end of tightening. Core inflation, which is rising again, is a key variable.

Fran?ois Villeroy de Galhau, Governor of the Bank of France and ECB policymaker, stated in a speech on the 12th (local time) at the Peterson Institute for International Economics (PIIE) in Washington, USA, that "We have already completed most of the rate hike journey."

He explained, "It is premature to decide what to do at next month's meeting, but there may be some room left to raise rates," adding, "The ECB must maintain borrowing costs at the peak if necessary. Maintaining rates longer is becoming more important than raising them further." However, regarding core inflation, he expressed caution, saying, "It is still strong," and "The turnaround in this trajectory should be the trigger to stop rate hikes."

Governor Villeroy's remarks seem to suggest that the ECB's aggressive monetary tightening policy is effectively entering its final stage. The market is focusing on the timing of the end of the ECB's tightening steps amid the spread of global banking crises and recession concerns. Central banks in countries such as South Korea and Canada have already stopped raising rates. In contrast, the ECB conducted a big step (a 0.5 percentage point increase in the benchmark rate) for the first time in 11 years in July last year and has raised rates six consecutive times at monetary policy meetings since then.

Within the ECB, voices calling for continued tightening are also emerging simultaneously. Roberts Holzmann, an ECB board member and Governor of the Austrian National Bank, considered a representative 'hawk,' said in an interview with German media on the same day, "The persistence of current inflation argues for an additional 50 basis points (1bp=0.01 percentage point) next month," emphasizing, "We must respond firmly. Significant benchmark rate hikes must continue even after next month." He dismissed the possibility of a baby step (0.25 percentage point increase).

These contrasting views show the ECB's deep concern in finding a balance between high inflation, economic slowdown, and banking crises. The variable is how much inflation will slow down going forward. Eurozone consumer prices in March rose 6.9% year-on-year, slowing for five consecutive months, but the core inflation rate rose 5.7%, marking the highest level since the introduction of the euro. Luis de Guindos, ECB Vice President, expressed concern, saying, "Headline inflation (overall consumer prices) will slow down, but I am not very optimistic about core inflation."