Central banks should be wary of ending a tightening cycle too soon, and stable inflation expectations need not imply that rate hikes can stop, according to a top European Central Bank (ECB) official.
In a speech prepared for a Tokyo conference, ECB executive board member Lorenzo Bini Smaghi said this is a lesson he has learned from the recent round of rate hikes. He said he was not intending to indicate future ECB moves.
The speech laid out the conditions facing major central banks in deciding when to start raising interest rates, how to communicate policy actions and when to end the tightening cycle.
"It would appear that in spite of the recent interest rate increases in the three largest areas monetary conditions have remained significantly expansionary, as confirmed by the ample liquidity conditions prevailing at the global level," it said.
When embarking on rate hikes, a central bank should not wait for inflation to appear and the lower the starting point for rates, the less it can afford to wait for confirmation of ongoing recovery, he said.
"This would clearly imply falling behind the curve and having to correct more sharply at a later stage with sharper interest rate increases," he said.
Deciding when to end a tightening cycle can be as tricky as deciding when to start, he said.