JACKSON HOLE, Wyoming (Reuters) – European Central Bank officials argued on Saturday for a sharp rise in interest rates in September amid still-high inflation that could erode the ECB’s credibility in terms of fight against soaring prices.
The ECB raised interest rates in July for the first time in 11 years, raising its deposit rate by 50 basis points to zero, as inflation fears outweighed risks of a deterioration. of the situation.
A similar rate hike, or even higher, is expected on 8 September.
Speaking at the Fed’s Jackson Hole Annual Economic Symposium, ECB Executive Board Member Isabel Schnabel, Banque de France Governor Franois Villeroy de Galhau and Latvian Central Bank Governor Martins Kazaks each pleaded in favor of drastic measures.
“The probability and cost of anchoring current high inflation to expectations is uncomfortably high,” said Isabel Schnabel. “In this environment, central banks need to act forcefully.”
Until a few days ago, markets were betting on a 50 basis point hike on 8 September, but many ECB members, speaking officially or unofficially, now believe that a 75 basis point hike basis points should also be considered.
“We must be able to discuss both 50 and 75 basis points as possible increases,” said Marins Kazaks, one of the members of the Board of Governors. “From today’s perspective, it should be at least 50,” he added.
With zero rates, the ECB stimulates the economy and remains far from the neutral rate, which is estimated by economists around 1.5%.
Franois Villeroy de Galhau said the neutral rate should be reached before the end of the year, while Marins Kazaks said it would be reached in the first quarter of next year.
“In my opinion, we could be there before the end of the year, after another significant stage in September”, declared Franois Villeroy de Galhau.
Isabel Schnabel also pointed out that inflation expectations were now at risk of exceeding the ECB’s medium-term target of 2% and that surveys suggested that the public had begun to lose confidence in central banks.
These rate hikes come as eurozone growth slows and the risk of recession is high.
However, such a recession would be mainly caused by soaring energy costs, which cannot be combated effectively by monetary policy. The recession is also unlikely to be enough to bring inflation back to target without a tightening of monetary policy, many observers believe.
The impending recession is an argument for an early rate hike, as it becomes difficult to communicate policy tightening when the economic slowdown is already visible.
(Report Balazs Koranyi, French version Jean-Michel Blot)
by Balazs Koranyi