ECB policymakers line up behind rate hike plans
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[June 17, 2023] FRANKFURT
(Reuters) -European Central Bank policymakers lined up behind plans to
raise interest rates again next month, but views diverged on policy
further down the road as underlying inflation remained stubbornly high
even as the economy is barely growing.
The ECB raised interest rates to a 22-year high of 3.50% on Thursday and
said it would move again in July, continuing what has been the fastest
pace of monetary tightening in the bank's quarter-century existence.
No policymaker took a firm stance on rate action beyond July, but
several hinted that the ECB may need to keep going.
"We still have more ground to cover," Bundesbank President Joachim Nagel
said in a speech. "We may need to keep raising rates after the summer
break."
Belgian policymaker Pierre Wunsch, who was among the first to recognise
the ECB's inflation problem, argued the bank would need to see a
"substantial" drop in underlying inflation, which filters out volatile
energy and food prices, not to raise rates in September.
"If core keeps at around 5% on a yearly basis in the coming months, then
we will increase beyond September," he added.
"If we look at the smoothed monthly numbers, they have been around 0.4%
a month for over a year," he said. "We don't really see a beginning of
slowdown there."
Underlying inflation eased to 5.3% in May, but a big chunk of the drop
was due to a one-off administrative discount in German transport prices.
Wunsch has said in the past that the ECB's deposit rate could hit 4% if
underlying inflation did not moderate. On Friday he said that conditions
for such a rate are materialising.
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Joachim Nagel, President of Germany's
federal reserve Bundesbank addresses the media during the bank's
annual news conference in Frankfurt, Germany March 1, 2023.
REUTERS/Kai Pfaffenbach/FILE PHOTO
Austria's Robert Holzmann, one of the most outspoken policy
conservatives, kept his powder dry on Friday, arguing that it was
too soon to say whether further hikes beyond July are needed.
Lithuania's Gediminas Simkus pushed back on market expectations for
early 2024 rate cuts, saying that such a rapid reversal would be
puzzling.
The ECB has long said that once rates peak they would stay there for
an extended period, but markets have always doubted this, mostly
because they expect the U.S. central bank to start cutting rates,
which could then force the ECB's hand.
Markets have now fully priced in one more rate hike and see a high
probability of a second move to 4% by October, even if uncertainty
remains.
The repricing comes as a host of bank analysts raised their
expectation for the ECB's terminal rate to 4%.
Joining the chorus behind rate hikes, Estonian central bank chief
Madis Muller said more rate action is needed.
"Euro zone interest rates have not yet peaked," Muller said in a
statement. "The ultimate goal is clear for the central bank - we
need to quickly get the price rise under control."
(Reporting by Balazs Koranyi, Andrius Sytas, Julia Payne, Francois
Murphy, and Terje Solsvik; Editing by Alex Richardson, Toby Chopra
and Jan Harvey)
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