Frankfurt The head of the Latvian central bank, Martins Kazaks, believes that further major steps are possible, even after the surprisingly large interest rate hike by the European Central Bank (ECB) on Thursday. The increase will probably not be the only big step, Kazaks told the Bloomberg news agency in an interview. “I would say that the interest rate hike in September must also be quite significant,” said the ECB Governing Council member.
The head of the Austrian central bank, Robert Holzmann, made a similar statement. “If it were just about inflation, we would probably go even harder,” he told ORF. You have to see how the economy develops until autumn. “Then we can probably decide whether to do another 0.5 or less or even more.”
The ECB hiked interest rates on Thursday for the first time in eleven years. Contrary to what many experts expected in advance, it raised interest rates by 0.5 percentage points. In June, however, ECB President Christine Lagarde promised an increase of 0.25 percentage points.
The background to the tightening of monetary policy is the high level of inflation in the euro area, which reached a record high of 8.6 percent in June. The price pressure is especially strong in the Baltic states. The inflation rate in Latvia was 19 percent and in Estonia even 22 percent. The ECB is aiming for a value of two percent in the medium term for the entire euro area.
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According to Holzmann, who is also a member of the Governing Council of the ECB, the central bank must now ensure that the very high inflation rates do not become entrenched in people’s minds and that inflation expectations are lifted.
“If the evidence were to strengthen, you might have to factor in a mild recession to bring inflation down,” he said. “We hope that won’t be necessary,” he added. At present, long-term inflation expectations have risen only slightly above two percent. However, there are some indications that these could go up more strongly.
More on Thursday’s ECB decision:
From the point of view of Italy’s central bank chief Ignazio Visco, it is still too early to determine the size of the next ECB rate hike. “There’s no way to tell right now whether 50 or 25 or whatever is going to be appropriate,” Visco told Bloomberg TV. The ECB will proceed step by step.
“We’ll see how we proceed depending on the data, but that doesn’t mean we’re not progressing in a gradual manner,” Visco said. Going gradually means going step by step and not going very slowly, said the head of the Banca d’Italia.
More: Bundesbank President defends ECB decisions: “The process of interest rate hikes must continue”