ECB shouldn’t stop raising rates while core inflation is increasing

According to Francois Villeroy de Galhau, governor of the Bank of France, the European Central Bank has no choice but to raise interest rates until core inflation reaches its highest levels. However, the governor also added that if higher rates succeed in limiting economic growth, the rate of increase could be reduced.

If you add up all recent interest rate hikes conducted by the ECB in the last three months, the amount of the increase is 200 basis points. This is the sharpest increase throughout history. It’s expected that the rate could reach 3% next year, which in turn means that the increases, which are needed to curb inflation, won’t stop.

Villeroy also warned that record high inflation of 10.7% could rise even higher over the next year. Thus, it will probably take at least 2-3 years to bring inflation down to the target level.

It’s worth noting that the rapid increase of interest rates has led to a neutral level of 1.5-2%, at which the bank doesn’t have to stimulate or reduce growth. This was confirmed by Villeroy in his interview with the Irish Times.

Nevertheless, it’s expected that the rate will be raised by 50 basis points in December, and then by the same amount at the beginning of next year.