No interest hikes are expected at the next European Central Bank Governing Council meeting, as the latest data suggest that ECB rates have reached a level that, if maintained, will contribute to the return of inflation to the medium-term target of 2%.
Cyprus Central Bank governor Constantinos Herodotou told CNA the meeting in Athens next week will look at the primary target of price stability of 2% inflation.
Since July 2022, the ECB has hiked its basic interest rate ten consecutive times or by a cumulative 450 basis points.
“I believe since the last hike in September, and based on the latest economic data at our disposal, it is rational to expect that we’ve reached a level where, if interest rates are maintained, price stability will revert to the level of 2% in the medium-term,” Herodotou told CNA.
Highlighting the importance of a data-dependent stance, Herodotou said, however, that the impact of developments in the Middle East, apart from the tragic toll on human life, should also be examined from an economic standpoint.
“But based on the latest available data, it would be rational not to expect a decision over a rate hike in the October (ECB monetary policy) meeting”.
Herodotou said that given the ECB decisions, there is still sizeable monetary policy transmission that has not been passed on to the Euro area’s economy, recalling that full monetary policy transmission to the Eurozone member-states has a time lag of approximately 18 months.
He said the ECB Governing Council examines three basic criteria in charting its monetary policy stance: the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
The ECB scrutinises all data that could affect these three basic criteria.
“We are looking into the developments in the world’s significant economies and other main financial markets to assess how they affect the Euro area’s economy and the ECB’s primary criteria, central to its monetary policy stance.
“Although (the Euro exchange rate) is not part of the policy, the exchange rate has an impact on inflation, and consequently, we are looking at how this feeds into our criteria assessment.
“But we are evaluating the exchange rate impact we don’t target at the exchange rate per se”.
