ECB policymakers voice concerns over EUR depreciation, back rate hikes

Over the weekend, we had several European Central Bank (ECB) policymakers speaking in interviews on the sidelines of the Kansas City Fed’s Jackson Hole Symposium, expressing their concerns over the depreciation of the euro while maintaining the case for further rate increases in the coming months.

ECB Governing Council member Francois Villeroy de Galhau noted that ECB needs another significant interest rate hike in September

On neutral rate and further rate hikes, he said "We could be there before the end of the year, after another significant step in September. Have no doubt that we at the ECB would if needed raise rates further beyond normalization: bringing inflation back to 2% is our responsibility; our will and our capacity to deliver on our mandate are unconditional.”

Olli Rehn voiced his concerns over the inflationary impact of the falling euro, saying, “Certainly we are monitoring the exchange rate. This indirect channel is important - we are monitoring it and are looking at it as one indicator. It’s already a significant consideration” in setting monetary policy.”

Commenting on the September rate hike outlook, Rehn said: “The reality is that we have excessively high inflation globally, also in Europe -- that’s why it’s action time. The next step will be a significant move in September, depending on the incoming data and the inflation outlook.”

“Monetary policy is now facing the dual dilemma of on the one hand maintaining inflation expectations anchored, and on the other hand avoiding that we would push the economy into a recession. We have a severe energy crisis in Europe. it's quite likely that the euro-zone economy is slowing down. It’s slowing down as we speak, Rehn said while speaking about the euro area economic outlook.

The central bank board member Isabel Schnabel said, "even if we enter a recession, we have little choice but to continue the normalization path."

"If there was a de-anchoring of inflation expectations, the effect on the economy would be even worse, Schnabel added.

She further said that rates need to stay high, cautioned against pausing on early signs of a potential turn in inflationary pressures, adding that central bank rate-setters should instead signal their "strong determination" to bring inflation back to target quickly.

Meanwhile, Martins Kazaks, another Governing Council member said that  he’s “not happy where the exchange rate has moved because the lower rate further fuels inflationary pressures and the benefit of cheaper exports is diminished by supply chain disruption.”

On the September rate hike decision, he said that “the increase needs to be strong and significant, and at the current moment, I would say 50 or 75 basis points.”

“At least 50 basis points would be appropriate,” he said, adding that “the pace at which monetary support is removed must be orderly.”

FX implications

At the press time, EUR/USD is licking its wounds around 0.9960, almost unchanged on the day. The mixed remarks from the ECB officials fail to have any impact on the shared currency, as the US dollar price action and the prevailing risk tone are likely dominating fx currencies in Asia this Monday.