Some market representatives are already betting on a 130 basis point rate hike.
(Photo: dpa)
Vienna The European Central Bank might have to accept a moderate recession in order to curb price pressure, said ECB Council member Robert Holzmann. “We hope that this will not be necessary,” said the governor of the Oesterreichische Nationalbank on Sunday in the news program ZiB 2.
Long-term inflation expectations are currently only slightly above the two percent mark. However, there are “some indications that this could increase more”.
The currency watchdogs in the euro zone raised key interest rates by half a percentage point this month, more than expected. ECB President Christine Lagarde has announced that tightening will continue until inflation returns to the central bank’s two percent target.
According to Holzmann, the extent of a rate hike in September will depend on the development of the economic outlook. There could be another 50 basis point hike, bigger or smaller.
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ECB Governing Council member Martins Kazaks made a similar statement in an interview in Frankfurt: “I wouldn’t say that it was the frontloading. I would say that the interest rate hike in September must also be quite significant,” said Kazaks, who is considered one of the most hawkish ECB central bankers.
More on Thursday’s ECB decision:
Asked if an even larger 75 basis point move like the Federal Reserve made in June might be possible next time, Kazaks urged council members to keep their options open.
“Given the uncertainty, the inflation dynamics and the risk of persistence, I would say that of course we should be open to discussion,” he said. However, the ECB should not simply follow the Fed.
Kazaks is head of the Central Bank of Latvia. Inflation in his country is currently over 20 percent.
Kazaks did not want to comment on possible scenarios for the October meeting of the ECB Council. However, he has “no major objections” to the latest market expectations of a tightening of 150 basis points by June next year.
Holzmann defends TPI
Those rate bets have since been reduced to about 130 basis points. “There are significant downside risks that are not part of the base case,” he said.
Holzmann defended the ECB’s Transmission Protection Instrument (TPI), which is designed to prevent potential turbulence in eurozone bond markets. The European Central Bank decided on the new crisis instrument at its council meeting in mid-July.
The instrument is necessary because “we have an incomplete monetary union, because we don’t have a central finance minister, because we don’t have a capital markets union, because we don’t have a banking markets union,” said Holzmann. “As a result, we have to try to use auxiliary instruments to hold the monetary union together.”
More: Goldman expert: “Market could test ECB’s willingness to use TPI”