ECB Official Urges Caution Over Expectations of More Interest Rate Hikes

Frankfurt: European Central Bank Vice President Boris Vujcic has cautioned financial markets against assuming that rising energy prices will automatically lead to a prolonged series of interest-rate increases in the euro zone.

In an interview with Reuters, Vujcic said ECB policymakers would examine a broad range of economic indicators rather than focus exclusively on oil and gas prices when determining the future path of monetary policy.

Energy Prices Drive Market Expectations

Investors have increased their expectations for additional ECB rate increases following the central bank’s recent decision to raise borrowing costs.

The shift in market expectations has been closely linked to higher energy prices amid the continuing conflict in the Middle East. However, Vujcic said energy costs are only one component of the ECB’s broader assessment.

He warned that concentrating too heavily on oil and gas prices could lead markets to misjudge the central bank’s future decisions.

Inflation Could Also Affect Economic Growth

Higher energy prices can raise inflation by increasing household and business costs. At the same time, prolonged expensive energy can reduce consumers’ disposable income and weaken spending.

Vujcic said persistent inflation during the autumn could therefore have an impact not only on prices but also on economic growth and household consumption.

A colder-than-usual winter could add further pressure if households face higher heating expenses.

Euro Zone Shows Some Resilience

Despite the risks, Vujcic said the euro-zone economy has demonstrated greater resilience than some earlier expectations suggested.

He pointed to exports and private consumption as areas supporting economic activity. The region’s reduced dependence on natural gas compared with several years ago has also changed the potential impact of energy supply disruptions.

This means the economic consequences of lower gas availability may not be identical to those seen during earlier periods of severe energy uncertainty.

ECB Keeps Policy Flexible

The ECB has recently moved its policy rate higher, and Vujcic said the pace of adjustments was appropriate for the time being.

However, he stressed that future decisions would depend on developments in inflation, economic activity, energy prices and other indicators.

Financial markets have been pricing in additional rate increases, but the ECB official’s comments indicate that policymakers are not committed to a predetermined sequence of hikes.

Bond Markets Also in Focus

Vujcic also discussed rising government bond yields around the world. He said current movements did not pose an immediate financial-stability threat to euro-zone banks, which he described as well capitalised and holding substantial liquidity.

At the same time, he stressed the importance of governments maintaining responsible fiscal policies as borrowing costs remain elevated.

The ECB will therefore continue balancing inflation risks against the possibility that tighter financial conditions could weaken economic growth.