Brussels: Bundesbank President Joachim Nagel kicked off warnings from hawkish officials that the European Central Bank’s historic campaign of interest-rate hikes may need to extend into the fall.
“As I see it, we still have more ground to cover,” Nagel said Friday in a speech. “We may need to keep raising rates after the summer break.”
That prospect was backed by policymakers from Austria, Slovenia and Lithuania. Belgian central bank chief Pierre Wunsch even suggested monetary tightening might need to persist beyond September.
The remarks came a day after the ECB increased its deposit rate by a quarter-point to 3.5 per cent, as expected, with President Christine Lagarde reiterating later on Friday that another move in July is “very likely.”
The focus now, though, is on the meeting after that - in September - about which Lagarde was tight-lipped. While the majority of analysts still expects the ECB to pause after next month’s increase, markets are almost fully pricing another hike beyond that - boosted by a slight upward revision this week in quarterly inflation projections.
ECB officials expect a tough debate next month over whether such further monetary tightening will be necessary, according to people familiar with their thinking.
While price gains have been moderating, Lagarde said the outlook for inflation - and the 20-nation euro-zone economy, which fell into a recession over the winter - remains “highly uncertain.”
Economists including those at Goldman Sachs are shifting their rate predictions upwards. Goldman now sees the deposit rate reaching 4 per cent as the stronger inflation projections presented this week “point to a higher hurdle to finish the hiking cycle in July.”
Without a retreat in the underlying measure of price gains that strips out energy and food, “there’s indeed the possibility that we would hike in September,” Belgium’s Wunsch told journalists in Brussels. “If core keeps at 5 per cent on a yearly basis in the coming months, then we’ll keep increasing even beyond September.”
Austrian central bank Governor Robert Holzmann said Friday that an “adjustment” in rates may be required in September if the current trend in consumer prices continues. He stressed that core is the key measure to watch.
Strong euro-area price growth calls for more ECB hikes and a sustained “tightening bias,” according to the International Monetary Fund. The deposit rate has been lifted already by 400 basis points since last July.
There was a little pushback.
Portugal’s Mario Centeno warned against “statements about the future,” while Bank of France Governor Francois Villeroy de Galhau said investor bets on hikes are “excessively volatile” and urged against drawing premature conclusions on where borrowing costs may eventually peak.
But the majority of voices were preparing the ground for more than one additional step.
In a radio interview Friday, Slovenia’s Bostjan Vasle said a September rate hike is possible, should inflation not abate sufficiently. If it turns out to be more persistent than it currently appears, “then of course further monetary-policy action will be necessary,” he said.
Lithuania’s Gediminas Simkus also refused to rule out a move then.
“It’s still too early to say what’s going to happen in September,” he told reporters in Vilnius. “We’ll have a few inflation reports, a GDP estimate - it’s still to early at this point with many uncertainties.”
Finland’s Olli Rehn said tightening “will continue at least in July.”