The ECB raised rates by 50 basis points to zero in July to tackle inflation which 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 board of governors, Villeroy said rates should continue to rise until the ECB hits the neutral level, which is between 1% and 2%. At the neutral rate, the central bank neither stimulates nor slows down growth.
“We could be there before the end of the year, after another milestone in September,” Villeroy told the US Federal Reserve’s Jackson Hole Economic Symposium.
With markets betting on a 50 basis point move in September, several ECB policymakers, including Dutch central bank chief Klaas Knot and Austrian Robert Holzmann, said 75 basis points should also do part of the discussion.
Villeroy said the ECB was ready to go higher than the neutral level, if necessary.
“Have no doubt that we at the ECB would raise rates beyond normalization if necessary: bringing inflation down to 2% is our responsibility; our willingness and ability to fulfill our mandate is unconditional,” he said. he added.
Specific forward guidance, as provided for years, is now considered inadvisable given the global economic uncertainties.
Villeroy did not openly acknowledge the growing risk of a recession, but noted that growth prospects are receding while the inflation outlook is deteriorating.
The banker said the ECB must also consider changing the way it manages excess reserves.
Banks are sitting on trillions of euros in excess liquidity and a rise in rates into positive territory provides banks with large risk-free returns, leaving the central bank with similar losses.
Villeroy promised a “rapid and pragmatic” evaluation of the reserve’s remuneration, but did not provide specific proposals.
“As we did with the prioritization, we need to think about a reserve remuneration system adapted to this new context,” he said.