Vujcic Cools Market Bets on Rate Hikes as ECB Eyes Broader Economic Indicators

Market expectations for European Central Bank rate hikes are being driven by higher energy prices, but ECB Vice President Boris Vujcic has cautioned against focusing solely on this factor. The euro zone's central bank increased borrowing costs last week due to the widening conflict in the Middle East pushing up fuel costs.

Vujcic emphasized that policymakers will consider a broader set of economic indicators when deciding their next moves, rather than just energy prices. He noted that persistently high energy prices would not only push up inflation but could also weaken economic growth by squeezing household incomes and spending.

However, Vujcic observed that the euro zone has reduced its reliance on natural gas in recent years, making low storage levels less of a threat than when Russia invaded Ukraine in 2022. He also pointed out that the economy has proven more resilient than expected thanks to exports and private consumption.

The ECB raised its policy rate from 2.0% to 2.50% in two steps in June and September, a pace that Vujcic said was worth maintaining 'for the time being'. The central bank may consider raising bank reserve requirements as a means of draining excess liquidity, rather than charging fees or reviving a tiered rate system.

Bond yields have scaled highs not seen since before the financial crisis on the back of higher expectations for inflation and interest rates. Vujcic said this does not pose a threat to financial stability due to euro zone banks being well-capitalized and stocked with liquidity, but he emphasized the importance of responsible fiscal policy from governments.