EconomyECB authorities advocate a big rate hike

ECB authorities advocate a big rate hike

European Central Bank (ECB) officials on Saturday called for a big interest rate hike next month as inflation remains uncomfortably high and the public may be losing confidence in the bank’s ability to fight inflation.

The ECB raised rates by 50 basis points to zero last month and a similar or even larger move is now expected on September 8, partly because of soaring inflation and partly because the US Federal Reserve is also moving with exceptionally large steps.

Speaking at the Fed’s annual economic symposium in Jackson Hole, Isabel Schnabel, member of the ECB Council; Francois Villeroy de Galhau, head of the French central bank, and Martins Kazaks, governor of the Latvian central bank, called for strong or significant monetary policy action.

“Both the probability and the cost of the current high inflation taking hold in expectations are uncomfortably high,” Schnabel said. “In this environment, central banks must act strongly.”

Until a few days ago, markets were betting on a 50 basis point move on September 8, but a number of money leaders, speaking privately and off the record, are now arguing that a 75 basis point move should also be considered.

“Advance rate hikes is a reasonable policy option,” Kazaks told Reuters. “We should be open to discussing both 50 basis points and 75 basis points as possible moves. From today’s perspective, it should be at least 50.”

Rate hikes should then continue, ECB officials argued.

With rates at zero, the ECB is stimulating the economy and remains far from the neutral rate, which economists estimate at around 1.5%.

Villeroy said the neutral rate should be reached before the end of the year, while Kazaks said it would come in the first quarter of next year.

“In my opinion, we could get there before the end of the year, after another significant step in September,” Villeroy said.

Schnabel also warned that inflation expectations now risk exceeding the ECB’s medium-term target of 2%, or “de-anchoring”, and polls suggest the public has started to lose confidence in central banks.

The rate hikes come despite euro zone growth slowing and the risk of recession looming over it.

But the recession will be due above all to rising energy costs, against which the currency is powerless.

In addition, many say the slowdown is unlikely to weigh on price growth enough to bring inflation back on target without monetary policy tightening.

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