The European Central Bank (ECB) should consider an initial increase in interest rates above the planned quarter-point hike if there are signs that high inflation readings are feeding expectations, Governing Council member Martins Kazaks said.
“If we see that the situation has worsened, that inflation is high and we see negative news in terms of inflation expectations, then in my view front-loading the increase would be a reasonable choice,” said Kazaks, the head of Latvia’s central bank, told Bloomberg Television in Sintra, Portugal.
The ECB should track “what happens in the labor market, what happens with the anchoring of expectations — do the expectations start going up?” Kazaks said, declining to speculate whether shifts in these factors could warrant a half-point hike.
Photo: Reuters
Money markets raised tightening wagers after his remarks, betting on 163 basis points of hikes this year, compared with 158 basis points on Monday.
ECB officials are gathering for their annual retreat as concerns build about the implications of next month’s first rate increase in more than a decade.
There is much to discuss: As borrowing costs rise, investors fret about a repeat of Europe’s debt crisis, while threats of a Russian energy cutoff are fueling fears of an economic downturn.
Kazaks called the risk of a recession “non-trivial” as soaring prices eat into consumption. Even so, he said he believes rates can be raised “quite quickly.”
The ECB will get more information on the inflation outlook later this week, with data for this month published on Friday expected to show a fresh record high.
Price growth is currently more than four times the ECB’s target of 2 percent.
In the meantime, pressure is building on the ECB to announce a new instrument to head off panic on government-debt markets as it lifts rates.
At an emergency meeting this month that followed a blowout in Italian bond yields, it agreed to accelerate work on a crisis tool.
ECB President Christine Lagarde and several of her colleagues say the so-called anti-fragmentation instrument is needed to safeguard efforts to tame inflation, though they have not revealed full details yet.
Kazaks said it was important that fragmentation “should not stand in the way of monetary policy normalization.” Measures to offset the potentially stimulative effect of bond purchases may be part of the new tool, he said.
“Sterilization could be an element,” Kazaks said. “My personal view is that it should be part of the instrument.”
Any new tool “should be a backstop” and used only when it is urgently needed, he said.
Until the plan is presented, officials aim to smooth potential market tensions by deploying reinvestments from the ECB’s COVID-19 pandemic-era asset-purchase program of 1.7 trillion euros (US$1.8 trillion).
In related news, Lagarde said the ECB would go “as far as necessary” to fight inflation that is set to remain “undesirably high” for “some time to come.”
Soaring inflation is “a great challenge,” Lagarde said in a speech at the bank’s annual conference on monetary policy. “We will go as far as necessary to ensure that inflation stabilizes at our 2 percent target over the medium term.”
Additional reporting by AFP
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