In a chorus of comments today, ECB Governing Council members underscored the need for continued monetary tightening to combat persistently high inflation.

Bundesbank President Joachim Nagel stressed the central bank “still have more ground to cover”, adding “we may need to keep raising rates after the summer break.”

“Once we have reached the peak, we will stay there until we are sure of a safe and timely return of inflation to our 2% target,” Nagel said. He also highlighted the necessity of reducing the central bank’s balance sheet to support this policy.

Bostjan Vasle, Chief of Slovenia’s central bank, echoed this sentiment. “If it turns out that inflation is more persistent than it seems at the moment…then of course further monetary-policy action will be necessary,” he noted.

In Lithuania, Central Bank Chief Simkus expressed concern about the prolonged high inflation, asserting that “over the medium term, inflation is not coming back to an appropriate level.” He also questioned market expectations for early 2024 rate cuts, suggesting that such a rapid reversal would be perplexing.

Meanwhile, Estonian Central Bank Chief Madis Muller clarified, “Euro zone interest rates have not yet peaked.” He added, “The ultimate goal is clear for the central bank: we need to quickly get the price rise under control.”

Finally, Finland’s Central Bank Chief Olli Rehn, voiced the need for restrictive interest rates to achieve a timely return of inflation to the 2% medium-term target. “The key ECB interest rates will be brought to levels sufficiently restrictive…and will be kept at those levels for as long as necessary,” Rehn concluded.

ECB is widely expected to keep monetary policy unchanged today. The central bank might shed some light on asset purchases after the end of the emergency program PEPP next March. But the details on what to follow will only be revealed at the December meeting, together with new economic projections. There are some expectations that the flexibility of the original APP would be increased, but this is far from being certain.

There are also speculations of an earlier rate hike, with market pricing it to happen by 2022 year end. But President Christine Lagarde would likely talk down such expectations. Instead, ECB would just reiterate that the policy rates would “remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon and judges that realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at 2% over the medium term”.

Some previews on ECB:

• ECB Preview – ECB to Convince Market Low Interest Rate Still Necessary Despite Rising Inflation
• ECB Meeting Preview: What To Expect?
• ECB Could Play Some Defense
• ECB Preview – The Prelude to December

ECB’s account of its June meeting revealed a wide consensus in favor of a 25 bps rate hike. Interestingly, the minutes also noted an initial preference for an even steeper hike of 50 basis points.

“A preference was also initially expressed for raising the key ECB interest rates by 50 basis points in view of the risk of high inflation becoming more persistent,” the minutes noted.

However, the adopted “data-dependent, meeting-by-meeting approach” and uncertainties in the global economic landscape resulted in the final decision for a 25bps increment.

Meanwhile, the account noted, “Emphasis was put on the need to be sufficiently restrictive and persistent in the monetary policy tightening.”

It’s crucial, as per ECB’s narrative, to convey that their monetary policy still has a long way to go to bring inflation back to the target in a timely manner.

The meeting minutes convey this message clearly, stating, “It was seen as essential to communicate that monetary policy had still more ground to cover to bring inflation back to target in a timely manner.”

Full ECB accounts here.

ECB Governing Council member Francois Villeroy de Galhau the PEPP asset purchase program will continue until at least March 2022. “Any suggestion of a reduction in our purchases before then – what is sometimes called by the technical term tapering or phasing-out – is purely speculative”, he said.

He added that even if the central was to ease back on the program, broader monetary policy stance would remain accommodative.