ECB policymakers are betting on a big rate hike

JACKSON HOLE, Wyo., Aug 27 (Reuters) – European Central Bank policymakers on Saturday argued for a big interest rate hike next month as inflation remains uneasy and the public may be losing out confidence in the bank’s credentials to fight inflation.

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

Speaking at the Fed’s annual Jackson Hole Economic Symposium, ECB board member Isabel Schnabel, French Central Bank chief Francois Villeroy de Galhau and Latvian central bank governor Martins Kazaks argued for action forceful or significant policy.

“Both the likelihood and the cost of current high inflation being fixed in expectations are uncomfortably high,” Schnabel said. “In this environment, central banks must act decisively.”

Markets were betting on a move of 50 basis points on September 8 until just a few days ago, but a host of policymakers, speaking in person and off the record, are now arguing that a move of 75 basis points should also be considered . Read more

“Early charge rate hikes are a reasonable policy option,” Kazaks told Reuters. “We should be open to discussing both 50 and 75 basis points as possible moves. From the current perspective, it should be at least 50.”

Rate hikes should then continue, policymakers argued.

With rates at zero, the ECB is stimulating the economy and staying away 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 arrive in the first quarter of next year.

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

Schnabel also warned that inflation expectations are now at risk of exceeding the ECB’s mediumterm target of 2%, or “deanchoring”, and polls have suggested that the public has begun to lose confidence in banks central Read more

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

But the recession is mainly due to rising energy costs, against which money is powerless. Many argue that the slowdown is also unlikely to weigh enough on price growth to return inflation to target without a policy tightening.

The looming downturn is an argument for raising the frontloading rate, as it becomes difficult to communicate policy tightening when the slowdown is already visible.

“With this high inflation, it will be difficult to avoid a recession, the risk is substantial and a technical recession is very likely,” Kazaks said.

Editing by Nick Zieminski

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