Monetary policymakers at the European Central Bank (ECB) again supported another big interest rate hike on Thursday, at a time when inflation in the euro zone’s largest economy hit double digits, beating expectations. and predicting another record figure for the block as a whole.
The ECB has raised rates by a total of 125 basis points at its last two meetings and has promised further hikes as skyrocketing food and energy costs trickle down to the rest of the economy and intensify underlying price pressures. .
German inflation soared to 10.9% this month, well above expectations for a 10% reading, bolstering the case for a further 75 basis point hike. This suggests that the figure for the 19-country euro zone, to be released on Friday, is also likely to exceed the 9.6% forecast.
“My option would be 75 (basis points)”, Gediminas Simkus, head of monetary policy at the ECB, told Bloomberg TV on the sidelines of a conference in Vilnius. “I understand that there may be a couple of options on the table, but 50 is the minimum.”.
Other authorities, such as the Slovakian Peter Kazimir, the Austrian Robert Holzmann and the Finnish Olli Rehn have put on the table an increase of 75 basis points in recent days, despite the fact that the next ECB meeting is still almost a month away, on October 27.
But Simkus, like Holzmann a day earlier, rejected suggestions of a 100 basis point hike, suggesting that hard-line officials aim at most for a repeat of this month’s 75 basis point hike, even if pressure from prices are far from diminishing.
“There is no easing in sight, and next year the rate of inflation is likely to fall because energy prices are unlikely to rise again as much as this year, in part due to government intervention.”, Commerzbank economist Ralph Solveen said of the German inflation figures.
Simkus, the governor of the Lithuanian central bank, also indicated that the ECB should start talks “as soon as possible” on reducing its balance sheet, a view echoed by his Estonian counterpart Madis Müller at the same event.
This would probably be done by not replacing some of the trillions of euros worth of bonds the ECB bought over the past decade – when trying to raise too low price growth – as they mature.
But the Portuguese Mario Centeno and the Spaniard Pablo Hernández de Cos opposed this idea, fearing that it would destabilize the bond market.
“Quantitative tightening could cause turmoil in certain market segments”, De Cos mentioned in a speech in Bilbao. “This could jeopardize the path of monetary normalization at a time when all our efforts should be focused on that goal.”.
Although few policymakers dared to estimate where interest rate hikes might end, De Cos said the models suggest a terminal rate significantly lower than markets now expect.
“According to the information currently available, the median value of the terminal rate in the different models is between 2.25% and 2.50%.”, he commented.
Markets currently expect rates to hit 2% by the end of the year and then rise to around 3% next spring.
De Cos also said that if the ECB starts to cut its balance sheet sooner than markets now expect, that would lower the terminal rate, suggesting a balance between rate hikes and balance sheet operations.
Talk of rate hikes is intensifying even as fears of a recession mount. The European Commission’s economic sentiment gauge released on Thursday fell more than feared, reinforcing expectations that the bloc could slip into recession in the fourth quarter.
With information from Reuters