central banks

ECB policymakers make the case for a big rate hike

Reuters
ECB policymakers make the case for a big rate hike

JACKSON HOLE. European Central Bank board member Isabel Schnabel attends a dinner program at Grand Teton National Park where financial leaders from around the world are gathering for the Jackson Hole Economic Symposium outside Jackson, Wyoming, August 25, 2022.

Jim Urquhart/Reuters

The European Central Bank raised rates by 50 basis points to zero in July and a similar or even bigger move is now expected on September 8

WYOMING, USA – European Central Bank (ECB) policymakers made the case on Saturday, August 27, for a large interest rate hike next month as inflation remains uncomfortably high and the public may be losing trust in the bank’s inflation-fighting credentials.

The ECB raised rates by 50 basis points to zero last month and a similar or even bigger move is now expected on September 8, partly on sky-high inflation and partly because the US Federal Reserve is also 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 all argued for forceful or significant policy action.

“Both the likelihood and the cost of current high inflation becoming entrenched in expectations are 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 just days ago but a host of policymakers, speaking on and off record, now argue that a 75-basis-point move should also be considered.

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

Rate hikes should then continue, the policymakers argued.

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

Villeroy said that the neutral rate should be reached before the end of the year while Kazaks said he would get there in the first quarter of next year.

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

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Schnabel also warned that inflation expectations were now at risk of moving above the ECB’s 2% medium term target, or “de-anchor,” and surveys suggested that the public has started to lose trust in central banks.

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

But the recession will be mostly due to soaring energy costs, against which monetary policy is powerless. The downturn is also unlikely to weigh on price growth enough to bring inflation back to target without policy tightening, many argue.

The looming downturn is an argument to front-load 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. – Rappler.com

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