ECB President Christine Lagarde, in her address to a European Parliament committee, expressed confidence in the current policy rates, emphasizing their effectiveness in steering inflation back towards the intended target.

“Based on our latest assessment,” Lagarde mentioned, “we consider that our policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.”

Lagarde also highlighted the headwinds faced by the euro area’s economy. After broadly stagnating during the first half of 2023, the economy has demonstrated signs of weakening further in the third quarter. This is particularly concerning given the previously resilient services sector, which is also starting to display weakness.

Lagarde elaborated, “The services sector, which had been resilient until recently, is now also weakening,” noting that “job creation in the services sector is moderating and overall momentum is slowing.”

Domestic price pressures, however, continue to remain formidable. A surge in holiday and travel spending combined with substantial wage growth is holding up services inflation.

Nevertheless, according to staff projections, “inflationary pressures are expected to moderate and that inflation is set to reach our target by the end of 2025.”

Full remarks of ECB Lagarde here.

In today’s conference in Madrid, Pablo Hernandez de Cos, a member of the ECB Governing Council, emphasized the need for patience in the bank’s approach to interest rates.

De Cos pointed out, “If we keep rates at these levels long enough, there are very good chances that we will be able to reach our 2% target in a timely manner.”

De Cos added that a balanced approach was crucial “to avoid both insufficient tightening, which would impede the achievement of our inflation target, and excessive tightening, which would unnecessarily damage economic activity and employment.”

Echoing a similar sentiment, fellow Governing Council member Francois Villeroy de Galhau warned against an aggressive tightening stance. He said, “If the ECB tightens too much, the central bank could run the risk of having to rapidly reverse course.”

Villeroy de Galhau further advised against a reckless calibration of monetary policy, asserting, “‘testing until it breaks’ is not a sensible way.” Instead, he recommended a shift in focus from constantly elevating rates to maintaining a consistent policy. In his words, the emphasis should be on “duration rather than level.”

ECB Governing Council member Francois Villeroy de Galhau spoke about the current monetary policy outlook in an interview with France Inter radio on Saturday. Emphasizing the need for a patient approach, Villeroy stated, “From today’s perspective, patience is more important than raising rates further.”

He highlighted the current deposit rate, which stands at a record 4%. According to Villeroy, this level should be held steady as it plays a crucial role in controlling inflation within Eurozone.

Amid concerns over the potential inflationary impact of rising oil prices on the global economy, Villeroy remained steadfast in the ECB’s commitment to its objectives.

“The recent increase in oil prices won’t derail the European Central Bank’s fight to tame inflation,” he asserted. Elaborating further on this, he said, “We’re very attentive, but [this] doesn’t put into doubt the underlying disinflation.”

Villeroy reiterated ECB’s target: “Our outlook and engagement is to bring inflation to around 2% in 2025.”

ECB’s Chief Economist, Philip Lane, offered insights into last week’s rate hike during a speech overnight. He noted that “the choice between holding at 375 and moving to 400 was finely balanced,” referring to the deposit rate. Lane went on to express that opting for an additional hike was a safer decision “at a margin”.

He believed that 4% deposit rate should be “consistent with a return of inflation to target within the projection horizon.” The condition is that it’s to be ” maintained for a sufficiently long duration”.

Looking to the future, Lane cautioned about the extended phase of uncertainty that looms regarding the disinflation process. Highlighting the intricacies of the present economic climate, Lane pointed to the “initial inflation shock, the lagged nature of wage adjustment in the euro area, [and] the considerable sectoral rebalancing” as contributors to the prolonged period of inflation uncertainty.

Full speech of ECB Lane here.