The ECB initiated the turnaround in interest rates by raising interest rates by 0.5 percentage points in July. According to insiders, an even larger rate hike is to be discussed for the upcoming interest rate meeting in September.
(Photo: dpa)
Jackson Hole According to insiders, some monetary watchdogs of the ECB want to discuss a particularly strong interest rate hike at the interest rate meeting in September due to deteriorating inflation prospects. To date, no euro watchdog has publicly advocated an increase of 0.75 percentage points. But the role model of the US Federal Reserve, which recently tightened interest rates twice in a row, and uninterrupted inflation in the euro area provide arguments for this.
“I’m not necessarily going to support 75, but there’s no reason why it shouldn’t be discussed,” one in five insiders told Reuters. “If the Fed did it, there’s no reason why we shouldn’t at least bring it to the table.” An ECB spokesman declined to comment on the information.
Admittedly, an interest rate step of 0.75 percentage points seems unlikely at the moment due to the expected opposition from currency watchdogs from the southern euro states. However, the comments support arguments for another sharp rate hike of 0.50 percentage points in September.
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Expectations of this kind were recently fueled by ECB Director Isabel Schnabel. From the German economist’s point of view, the inflation outlook has not improved since the July interest rate meeting, as she said a week ago. The European Central Bank (ECB) initiated the turnaround in interest rates at the meeting and, contrary to what had previously been promised, raised the key rates by a strong 0.50 percentage points. It was the first increase in eleven years.
“Inflation is becoming more widespread and the second-round effects are clear,” said a second insider. “The outlook is much worse than we projected in June, so I agree that 75 should at least be discussed.” Markets, meanwhile, are firmly expecting a 0.50 percentage point hike at the September 8 rate meeting.
For the next two ECB interest rate meetings this year, an increase of a further 0.75 percentage points is expected. “For me, 50 is the minimum. More data will come in before September 8, but now I see a strong case for 75,” added a third insider.
The threat of recession is no obstacle
From the insider’s point of view, an impending recession in the euro area does not pose an obstacle to a significant increase in interest rates. Normally, interest rate increases exacerbate recessions. Raising into a downturn is therefore viewed critically. But according to people familiar with the deliberations, Europe’s case is special at the moment.
Because the economic slowdown is to a large extent a consequence of rising energy prices and a shortage of Russian gas as a result of the Ukraine war. However, the central bank’s resources are limited against such a so-called “supply shock”.
Insiders warned that failure by the central bank to act could result in energy becoming even more expensive. They pointed out that the exchange rate of the euro would then probably weaken. They also see the danger that long-term inflation expectations could get out of hand.
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In this case, the central bank might have to take much more countermeasures later, they explained. Currently, long-term inflation expectations are not far from the ECB’s inflation target of two percent – which shows that investors have fundamental confidence in the ECB’s policy. But there is now some evidence that they are moving away from what central bankers call “unanchoring”.
A decision to end reinvestments in the multi-trillion bond purchase program APP is not expected at the September meeting. Such a decision is not yet necessary, said people familiar with the considerations. So far, the ECB has promised that the reinvestment of funds from expired bonds in the APP program will continue for a long time after the first interest rate hike.
However, ECB governor Schnabel recently said some policymakers could raise the issue at the September meeting. According to insiders, however, discussions have not yet started. “There’s just no urgency,” said one of the people. “I think interest rates are our main focus right now.”
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