The ECB is just letting go of the accelerator; rate hike not automatic: Villeroy

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Banque de France Governor Francois Villeroy de Galhau delivers a speech during the annual meeting of small and medium-sized business leaders at the Banque de France in Paris, France, October 22, 2021. REUTERS/Sarah Meyssonnier

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PARIS, March 11 (Reuters) – The European Central Bank is content to dampen the stimulus, not tighten policy, and an interest rate hike will not be automatic, French Central Bank President Francois Villeroy de Galhau.

The ECB accelerated its exit from hearty bond purchases in a surprise move on Thursday, opening the door for a year-end interest rate hike, despite the uncertainty created by Russia’s war in Ukraine.

“We said that if the rise in interest rates were to start, it would be very gradual,” Villeroy told BFM Business radio. “We have decided to take our foot off the accelerator…but there is not the automaticity that we have seen in other central banks.”

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Finnish central bank chief Olli Rehn, a proponent of caution ahead of the meeting, also confirmed that view on Friday.

“Any adjustments to the key ECB interest rates will take place some time after the end (of asset purchases) and will be gradual,” Rehn said.

Markets now expect around 40 basis points of rate hikes by the end of the year, although economists are more cautious, generally predicting a 25 basis point increase in the ECB deposit rate minus 0 .5%.

Villeroy, generally seen as a centrist on the ECB’s 25-member Governing Council, also appeared to dismiss analysts’ warnings that soaring commodity prices could push the bloc into a recession.

“Growth remains positive, there is no recession,” he said.

The ECB was widely seen as staying put on Thursday, but inflationary pressures, already well before the war in Ukraine, overshadowed all other considerations.

Inflation is expected to reach 5.1% this year, more than double the ECB’s 2% target, and stay above the target next year, also for the third consecutive year of overshoots .

In 2024, however, the ECB sees inflation returning to below 2%, a view also confirmed by Villeroy.

“Inflation in Europe should come down to around 2%,” he said.

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Reporting by Sudip Kar-Gupta and Anne Kauranen; Editing by Benoit Van Overstraeten Writing by Balazs Koranyi Editing by Raissa Kasolowsky

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