With Europe at risk of a recession, officials dropped an earlier reference to rate increases continuing for “several meetings,” saying simply they expect borrowing costs to be raised “further.” Image Credit: AFP

Belgium: The European Central Bank must take more firm action to combat record inflation, even after delivering back-to-back hikes in interest rates of 75 basis points, according to officials from the Governing Council’s more hawkish flank.

After investors interpreted this week’s ECB decisions as a sign that policymakers may be easing off a touch in their efforts, Lithuania’s Gediminas Simkus urged another strong increase in borrowing costs at the final meeting of this year in December.

His Slovak colleague, Peter Kazimir, was even tougher, saying rates will have to move to levels that will restrain the economy in order to get inflation under control.

“We will pass through the neutral rate - regardless of where anyone currently sees it - like a runaway train,” Kazimir said Friday in a statement. “We need to get monetary policy into the so-called restrictive environment at least for a certain period.”

The ECB on Thursday doubled its key interest rate to 1.5 per cent - the highest level in more than a decade - while also toughening the terms on pandemic-era loans to banks. But with Europe at risk of a recession, officials dropped an earlier reference to rate increases continuing for “several meetings,” saying simply they expect borrowing costs to be raised “further.”

Time for decisive action

Money markets pared wagers on monetary tightening after the decision, while the euro also slid. Economists including Goldman Sachs’s Jari Stehn said policymakers may be setting themselves up for slowing rate hikes, even as President Christine Lagarde told journalists that there’s still “ground to cover.”

Lithuania’s Simkus said inflation trends continue to intensify, and that it remains important to take “decisive action.”

Backing that view, data Friday showed a huge jump in Italian consumer prices, which rose this month by a euro-era record of 12.8 per cent, while French inflation also topped analyst estimates.

“Monetary policy is still expansionary,” Simkus said in Vilnius. “I have no doubt we’ll have another increase, that it will have to be substantial.”

Slovenian central bank chief Bostjan Vasle said “further increases in interest rates” are to be expected, with the magnitude to be decided at each meeting depending on the outlook for inflation and economic growth.

Officials have previously talked about the need to reach a “neutral” level of interest rates that neither stimulates nor restricts the economy, before taking stock. While that’s thought to be somewhere around 2 per cent, Lagarde on Thursday called the rate “evasive” and “not necessarily helpful.”

Estonian Governing Council member Madis Muller signaled Friday that officials aren’t there yet.

“It is quite clear that interest rates will continue to rise in the euro area in the near future,” he said in a statement. “Interest rates are still rather low in historical comparison and do not yet have a clear restrictive effect on economic activity or price rises.”

Most economists predict that the ECB will opt for a smaller half-point rate increase when it meets in December and that it will pause after one or two more hikes in early 2023.

Supporting such expectations, French Governing Council member Francois Villeroy de Galhau said officials won’t necessarily go for another three-quarter-point hike in December.

“We’re not subscribed to what one calls jumbo increases,” the Bank of France chief told “We’re in no way obligated during our next meeting to reproduce the increase of 75 basis points that we did in September and October.”