FRANKFURT — The European Central Bank will have to raise interest rates again to prevent high inflation from getting entrenched, and markets may be underestimating what is needed to quell price pressures, Slovak central bank chief Peter Kazimir said on Monday, Reuters reported. Kazimir, a hawkish voice on the ECB's 27-member Governing Council, is the latest policymaker to make the case for adding to the ECB's two rate hikes sooner rather than later, after the bank kept rates unchanged last week.
Source: Reuters, Nov 2
"For me, the question is increasingly not whether further action will be needed but how much more will be required," Kazimir said. "Markets may still underestimate what is required. The issue is not one meeting or one move. It is the path needed to bring inflation back to target and keep it there," he added. Financial markets now see between two and three rate hikes from the ECB over the next year before a slow retreat, Reuters reported, as market-based inflation indicators suggest price growth will stay well above the ECB's 2% target for years to come.
Source: Reuters, Nov 2
Why Kazimir says waiting is the risk
The ECB held rates unchanged last Thursday on the premise that second-round inflation effects have yet to take hold, wage growth is muted and economic growth is likely to take a hit from surging longer-term borrowing costs, Reuters reported. Kazimir said those premises were not necessarily as reassuring as some think: cost pressures could build before businesses pass them on, and expectations could shift before wider price pressures appeared in the data. "Waiting for certainty does not necessarily make for good policy," he said.
Source: Reuters, Nov 2
Kazimir also argued that a slowdown in growth does not necessarily weaken inflation, since cost pressures have already been building for months, and that growth is relatively solid because government budgets are buffering the economy — a lack of fiscal prudence can also keep price pressures up, he added. The immediate market reaction was limited: FXStreet, reporting the same comments during the European session, noted the euro was up 0.7% against the US dollar to near 1.1230, which it attributed largely to US dollar weakness.
Source: Reuters; FXStreet, Nov 2
Awaaz Punjab reported the ECB's decision to hold rates last Thursday, when the bank warned that surging energy prices were pushing inflation risks higher. Read the ECB hold report
What is solid
- Kazimir said on Monday that further ECB action is increasingly a question of how much, not whether, and that markets may underestimate the path required to return inflation to target — reported by Reuters and FXStreet.
- The ECB kept rates unchanged last Thursday; markets now price between two and three further hikes over the next year, according to Reuters.
What is only claimed
- How much more tightening is actually required is Kazimir's judgement as one Governing Council member, not an ECB decision — no new rate move has been announced, and other policymakers have weighed the muted wage growth and the growth hit from higher borrowing costs differently.
"Last week's pause was not a finish line," Kazimir said. "We should act before high inflation starts to feel normal." What happens next: the Governing Council's debate now turns on timing and scale — whether the December meeting, which earlier reporting suggested was seen as the likely next hike, is enough, or whether the path Kazimir describes requires more. For households and businesses across the euro zone — and for Indian and Punjabi workers and students in Europe whose rents, loan costs and remittance values move with ECB policy and the euro — the difference between two hikes and three is real money.
Source: Reuters, Nov 2