by Balazs Koranyi
JACKSON HOLE, Wyoming, Aug 27 (Reuters) – European Central Bank officials argued on Saturday for a sharp hike in interest rates in September amid still-high inflation that could damage the credibility of the ECB in the 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, if not greater, rate hike is expected on September 8.
Speaking at the Fed’s annual economic symposium in Jackson Hole, ECB Executive Board Member Isabel Schnabel, Banque de France Governor François Villeroy de Galhau and Central Bank of Latvia Governor Martins Kazaks each pleaded for strong measures.
“The probability and cost of anchoring the current high inflation in 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 a large number of ECB members, speaking officially or unofficially, now believe that a rise of 75 basis points should also be considered.
“We need to be able to discuss both 50 and 75 basis points as possible hikes,” said Marins Kazaks, one of the Board of Governors members. “From today’s perspective, it should be at least 50,” he added.
With rates at zero, the ECB is stimulating the economy and staying away from the neutral rate, which is estimated by economists at around 1.5%.
François 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,” said François 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 started 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 Bélot)