According to Pierre Wunsch, the Governor of the National Bank of Belgium, the European Central Bank (ECB) should continue raising interest rates to combat inflation, which increased in March to 3.5%, the highest rate since the 2008 financial crisis. The Federal Reserve is also pursuing a similar strategy in the US, with interest rates ranging from 4.75% to 5%. While raising the benchmark aims to limit money supply and curb inflation, it can discourage investors, including those interested in cryptocurrencies, by increasing borrowing costs.
May See Another Increase of up to 50 Basis Points
Wunsch believes that the ECB should speed up the reduction of its balance sheet to facilitate additional interest rate hikes:
“We need to do more on quantitative tightening. We could do a full stop of reinvestments this year, and even with that, it will take years to run down the portfolio.”
Wunsch, who was among the first to warn of worrying inflation levels on the continent, describes a potential interest rate increase of another 75 basis points as a “reasonable” measure. However, he expects the next hike to be a quarter or a half percent. He also thinks that the ECB should continue with its strategy until it reaches its target of a 2% inflation rate, which could benefit consumers and foster economic growth. The ECB recently increased interest rates by 0.5% to 3.5%, even though inflation has cooled off to 6.9% (as of March 2023).
Bank of France Governor Opposes Wunsch’s Stance
Francois Villeroy de Galhau, Governor of the Banque de France, believes that the ECB has already enforced most of its interest rate hikes:
“We have already completed most of our rate-hiking journey, and the strongest economic effect ahead of us will be the pass-through of what’s already in the pipe.”
Galhau believes that the central bank should enter into a more “open” phase where interest rates remain untouched for a prolonged time instead of being lifted after each committee meeting:
“For interest rates, as with ballistics, longer is becoming more significant than higher.”