Exclusive-ECB’s Vujcic cools oil-fuelled bets on rate hikes

Frankfurt, September 18 (Reuters) - Market expectations for additional European Central Bank rate hikes are primarily driven by higher energy prices, according to ECB Vice President Boris Vujcic. However, Vujcic cautioned against relying solely on oil and gas prices when determining monetary policy. The interest rate path is mainly influenced by rising energy prices, but Vujcic emphasized that policymakers consider a broader set of economic indicators before making decisions.

Persistently high energy prices could not only inflate inflation but also weaken economic growth by straining household incomes and consumer spending. Lower storage levels of natural gas, which was a concern following Russia's invasion of Ukraine in 2022, has diminished due to the euro zone's reduced reliance on natural gas over the past four years.

Moreover, the economy has demonstrated greater resilience than anticipated, thanks to strong exports and consumer spending. Vujcic acknowledged that the ECB has increased its policy rate twice this year, and he suggested maintaining this pace for now. The central bank has not excessively focused on labeling interest rates as restrictive, but rather evaluated what level of rates is suitable in a given situation.

Vujcic also hinted at the possibility of raising bank reserve requirements as a means to drain excess liquidity, which could save central banks billions in interest payments. While bond yields have surged due to higher inflation and interest rate expectations, Vujcic noted that euro zone banks are well-capitalized and liquid. However, he stressed that responsible fiscal policy from governments is crucial for long-term financial stability.