ECB policymakers argue for a big rate hike

Content of the article

JACKSON HOLE — European Central Bank policymakers on Saturday argued for a sharp hike in interest rates next month as inflation remains uncomfortably high and the public could lose confidence in the bank’s financial credentials. of fighting inflation.

The ECB raised rates by 50 basis points to zero last month and a similar, if not bigger, move is now expected on September 8, partly because of soaring inflation and partly because the US Federal Reserve is also progressing in exceptionally large steps.

Content of the article

Speaking at the Fed’s Annual Economic Symposium in Jackson Hole, ECB Board Member Isabel Schnabel, French Central Bank Chief Francois Villeroy de Galhau and Latvian Central Bank Governor Martins Kazaks , all pleaded for forceful or meaningful political action.

Content of the article

“The likelihood and cost of current high inflation rooted in expectations is uncomfortably high,” Schnabel said. « In this environment, central banks need to act forcefully. »

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

“Frontloading rate hikes is a sensible policy choice,” Kazaks told Reuters. “We should be open to discussing both 50 and 75 basis points as possible moves. From the current perspective, that should be at least 50.”

Rate hikes should then continue, policymakers argued.

With rates at zero, the ECB stimulates the economy and remains far from the neutral rate, estimated by economists at around 1.5%.

Content of the article

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

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

Schnabel also warned that inflation expectations now risked overshooting the ECB’s 2% medium-term target, or « unanchoring », and polls suggest the public has begun to lose faith in central banks.

The rate hikes come even as eurozone growth slows and the risk of a recession looms.

But the recession will be mainly due to soaring energy prices, against which the currency is powerless. The slowdown is also unlikely to weigh enough on price growth to bring inflation back to target without policy tightening, many say.

The impending slowdown is an argument for early rate hikes as it becomes difficult to communicate policy tightening when the slowdown is already visible.

« With this high inflation, avoiding a recession will be difficult, the risk is substantial and a technical recession is very likely, » Kazaks said. (Editing by Nick Zieminski)