European Central Bank Vice President Boris Vujcic has pushed back against market expectations for further interest rate hikes driven largely by rising energy prices, stressing that monetary policy decisions should not hinge solely on oil and gas price movements but must instead weigh a broader set of data covering inflation, economic growth, and household consumption.

In comments reported on Wednesday, Vujcic said the current market pricing for the ECB's future rate path is "mainly driven by energy price increases," yet relying on energy costs as the single driver of monetary policy is "not advisable." Investors have stepped up bets on further tightening since the ECB's rate hike last week, following a surge in fuel costs triggered by Middle East conflict.

Money markets currently anticipate three to four additional rate increases by the ECB before the end of next year, with the earliest move possible in October, which would lift the deposit rate to between 3.25% and 3.50%. Vujcic's remarks imply that the rate trajectory embedded in market pricing still depends on forthcoming economic data.

Energy Prices Hit Both Inflation and Growth; Rate Path Remains Data-Dependent

Vujcic noted that persistently higher energy costs not only stoke inflation but could also drag on economic growth by squeezing household incomes and consumption. If inflation stays elevated through the autumn and dampens consumer spending, GDP will likewise come under pressure; a harsh winter driving up heating bills could amplify that impact.

However, compared with the early stages of the Russia-Ukraine conflict in 2022, the euro area's reliance on natural gas has declined significantly, making the risks from currently low gas storage levels relatively contained. Vujcic said the euro zone economy has also shown greater resilience than expected, with exports and private consumption still providing support, with the latter expected to remain "fairly solid."

The ECB has raised rates twice, in June and September, lifting its policy rate from 2.0% to 2.50%. Vujcic believes this pace of tightening is "worth maintaining" for now, with adjustments to be guided by data over the coming months. Rather than debating whether rates above 2.50% qualify as "restrictive," he said, the more useful question is what level is most appropriate for a given period.

In addition, Vujcic views raising the minimum reserve requirement as a viable tool for absorbing excess liquidity. The massive surplus liquidity accumulated through a decade of accommodative policy costs euro area central banks billions of euros in interest annually. Compared with charging fees or reviving the complex tiered rate system, he prefers offsetting some of that liquidity by increasing reserve requirements.

On the recent climb in global bond yields, Vujcic said it has not yet posed a clear threat to financial stability, with euro zone banks holding adequate capital and liquidity. Still, he cautioned that governments must maintain fiscal discipline. Over time, if inflation expectations recede, bond markets may reprice; in the long run, responsible fiscal policy remains a critical component of sustaining financial market stability.