Gediminas Simkus, who runs Lithuania's central bank and sits on the ECB's Governing Council, said recent readings suggest underlying price pressures are still building. Speaking in Bangkok while attending IMF meetings, he put it plainly: "We've received more evidence since September that suggest some tightening of monetary policy might be needed."
He flagged three stress points: September inflation beat expectations, energy has been pricier than assumed, and labor conditions remain relatively strong. For now, officials don't see clear second round effects from higher oil and gas, echoing Christine Lagarde's earlier comments, but Simkus cautioned that "the longer energy prices stay elevated, the higher the probability that they will spread."
On Wednesday, Belgium's central bank chief, Pierre Wunsch, said on Bloomberg Television that "we are probably going to have to hike again," even if uncertainty remains high.
Central bankers signalling ahead of meetings is how policy gets telegraphed. Market Briefs covers the ECB free every morning.
Simkus pointed out that the climb in sovereign yields pulls the policy stance the other way, while saying he isn't overly worried about euro area bond markets after a recent France led selloff. "It's very important to distinguish between market fragmentation and legitimate repricing of sovereign risk," he said, adding that the rise in French yields reflects markets assessing debt levels, political uncertainties and fiscal fundamentals. It is "to some extent" normal for countries to face different borrowing costs, and "Not every increase in sovereign yields" amounts to fragmentation.
As for backstops, the ECB's Transmission Protection Instrument has not been used, and Simkus does not see a reason to activate it now. "I do believe that things will be settled," he said. "I definitely don't see a role for the ECB at this junction."
On bank reserves, he noted lenders must currently hold 1% of certain liabilities, mainly customer deposits, in a non interest bearing account at the central bank. Raising that requirement would reduce interest paid to banks, helping address losses accumulated through quantitative easing. He called the minimum reserve a "structural part" of the framework, not an "actively managed instrument." "We shouldn't change the reserve requirement in response to economic and monetary conditions," he said, while also noting that talking about the issue is fine and the current level is not "carved in stone."
The near term picture is mixed: data point to persistent price pressures that could argue for another hike, while the rise in sovereign yields is pulling the other way. With officials weighing both, households and businesses should expect the cost of money to remain in flux as the ECB approaches its October and December meetings.
One more hike or none changes borrowing costs across the bloc. Get the free Market Briefs daily newsletter and follow it.
