MIKULOV: Record-high euro zone inflation requires the European Central Bank to raise interest rates in July and bigger moves than so far signalled may be needed to contain prices, ECB policymaker Peter Kazimir said on Tuesday.
Inflation hit 8.1% in May, more than four times the ECB’s 2% target, with underlying prices also soaring, challenging the bank’s view that 25 basis point rate hikes from July will be enough to tame stubbornly high price growth.
“The data, in my view cement the necessity to take the first step in raising rates,” Kazimir, the relatively hawkish chief of Slovakia’s central bank said. “My baseline is for 25 basis points (in July) but I’m open to talk about 50 basis points.”
“I expect that we will go with 25 in July, then 50 basis points could be in September,” Kazimir told Reuters in an interview.
The ECB’s deposit rate, now at minus 0.5%, has been in negative territory since 2014 and the bank has not raised rates in over a decade.
The problem is that inflation is proving more stubborn than thought just a few months ago, with even underlying inflation, which filters out volatile food and fuel prices, at more than twice the ECB’s target.
To tame prices, the ECB will need to raise rates back to the “neutral” level, where it is neither stimulating nor holding back growth, but even this may not be enough, Kazimir said.
“The neutral rate is somewhere between 1% and 2%. For me, it is closer to 2%,” Kazimir said. “So, what is in front of us is about a 200 (basis) point journey. We could achieve it next year.”
Asked whether that would be sufficient, Kazimir said: “It seems to me now that it won’t be enough.”
Not At Target Until 2025
ECB President Christine Lagarde last week said that interest rates should be back at zero or somewhat above it by the end of September, before moving toward the neutral rate later on.
Most policymakers have backed a 25 basis point hike in July but several, including the central bank chiefs of the Netherlands, Austria and Latvia said that a 50 basis point move should remain on the table.
The ECB until recently expected inflation back at target in 2024 but Kazimir said price growth is still going to be above target then and he now hoped to get back to 2% in 2025.
Such a timeline would suggest four straight years of inflation overshoots, which risked stoking inflation expectations within the broader economy.
Such “de-anchoring” of expectations is not yet happening, Kazimir said, but there are worrisome signs in wage-setting, which suggests that high energy costs are filtering through the economy.
Kazimir added that the ECB should fight unwarranted fragmentation among the debt markets of euro zone members but he opposed a general backstop or a pre-announced tool that would kick in automatically.
“I think we have the capacity to come up with a tailor-made tool if it’s needed; I don’t think we need to pre-announce details,” he said.