Intense debate within the European Central Bank over the endpoint of rate hikes: Economists expect a "final hike" in December, officials say it is nearing the restrictive zone

According to information from Zhihui Finance APP, European Central Bank Governing Council member Primož Dolenc stated that tighter financial conditions may reduce the necessity for the European Central Bank to take monetary policy action. In an interview during the International Monetary Fund (IMF) annual meeting, he said, "We have already seen a considerable degree of repricing in the market," and, "If financial markets tighten, then perhaps we won’t need to do as much as we originally thought."

After two interest rate hikes, policymakers are debating how much further rates need to be raised in order to return inflation, which is approaching 4%, to target. Price pressures in September were stronger than expected, and the economy has shown greater resilience than anticipated.

Economists expect the European Central Bank to implement its last rate hike in December, by which time the deposit rate will rise to 2.75%—with some estimating that this level will begin to restrain economic activity.

When asked about this outlook, Dolenc said the European Central Bank "is approaching the restrictive zone—it may not have fully arrived, but it is on the edge."

European Central Bank Governing Council members, Belgian Central Bank Governor Pierre Wunsch and Lithuanian Central Bank Governor Gediminas Šimkus, respectively emphasized the latest inflation data in interviews, arguing that further tightening may still be necessary. The latter stated that while action in December will be based on more data, action this month cannot be ruled out either.

"In our situation, second-round effects have not yet appeared, or have not yet become obvious," Dolenc said, echoing similar remarks made earlier this week by Šimkus and European Central Bank President Christine Lagarde.

Portuguese Central Bank Governor Álvaro Santos Pereira added, "The good news is that so far inflation in Europe has not spread," and added that he has "no doubt" the European Central Bank will achieve its price target.

Any decision will be complicated by investors’ concerns over the fiscal status of France and other highly indebted eurozone member states. France has led the recent bond market sell-off, pushing the yield on 10-year government bonds to their highest level in nearly a quarter of a century.

French Central Bank Governor Emmanuel Moulin believes that higher sovereign borrowing costs are putting pressure on financial conditions, which may dampen demand as well as inflation.

Meanwhile, economists and investors are speculating on how severe market conditions must become before the European Central Bank is willing to intervene.

"We have different monetary policy measures in our toolbox, even including the Transmission Protection Instrument (TPI)," Dolenc said. "If necessary and if the conditions are met, they will be used, or may be used. At present, it is difficult to speculate when, how, and why the different tools will be used."

Austrian Central Bank Governor Martin Kocher agreed with this view.

"Pre-commitment would be disadvantageous," he said. "The European Central Bank has a toolbox. The toolbox allows quite a few tools, and I don’t think we are at the point where we need to discuss any of them. But if needed, they are there."

Kocher also emphasized that some European Central Bank observers have suggested that quantitative tightening (QT) could be paused to eliminate sources of market pressure, but quantitative tightening is "actually gradual."

"It is passive and very predictable," he said. "In terms of bond prices and bond yields, could there be any development in the market that requires adjustment of this policy? We don’t know."

Lagarde herself is French, and she has passed the ball to President Emmanuel Macron’s government, encouraging politicians to work hard to reduce a deficit that has soared to nearly twice the limit allowed by EU regulations. But she also recently told a group of finance ministers that the European Central Bank has tools to respond to the situation if necessary.

In Europe, the United States, and other regions, rising government borrowing costs have been a major agenda item at the global financial officials’ meeting in Bangkok. IMF Managing Director Kristalina Georgieva last week called on policymakers to take urgent action to reduce high debt and budget deficits.