ECB should keep 50 bps hike on table, possibly for Sept: Kazimir
By Balazs Koranyi – Reuters
MIKULOV, Czech Republic, May 31 (Reuters) – Record-high euro zone inflation requires the European Central Bank to raise interest rates in July and bigger moves than so far signalled may be needed to contain prices, ECB policymaker Peter Kazimir said on Tuesday.
Inflation hit 8.1% in May, more than four times the ECB’s 2% target, with underlying prices also soaring, challenging the bank’s view that 25 basis point rate hikes from July will be enough to tame stubbornly high price growth.
„The data, in my view cement the necessity to take the first step in raising rates,“ Kazimir, the relatively hawkish chief of Slovakia’s central bank said. „My baseline is for 25 basis points (in July) but I’m open to talk about 50 basis points.“
„I expect that we will go with 25 in July, then 50 basis points could be in September,“ Kazimir told Reuters in an interview.
The ECB’s deposit rate, now at minus 0.5%, has been in negative territory since 2014 and the bank has not raised rates in over a decade.
The problem is that inflation is proving more stubborn than thought just a few months ago, with even underlying inflation, which filters out volatile food and fuel prices, at more than twice the ECB’s target.
To tame prices, the ECB will need to raise rates back to the „neutral“ level, where it is neither stimulating nor holding back growth, but even this may not be enough, Kazimir said.
„The neutral rate is somewhere between 1% and 2%. For me, it is closer to 2%,“ Kazimir said. „So, what is in front of us is about a 200 (basis) point journey. We could achieve it next year.“
Asked whether that would be sufficient, Kazimir said: „It seems to me now that it won’t be enough.“
NOT AT TARGET UNTIL 2025
ECB President Christine Lagarde last week said that interest rates should be back at zero or somewhat above it by the end of September, before moving toward the neutral rate later on.
Most policymakers have backed a 25 basis point hike in July but several, including the central bank chiefs of the Netherlands, Austria and Latvia said that a 50 basis point move should remain on the table.
The ECB until recently expected inflation back at target in 2024 but Kazimir said price growth is still going to be above target then and he now hoped to get back to 2% in 2025.
Such a timeline would suggest four straight years of inflation overshoots, which risked stoking inflation expectations within the broader economy.
Such „de-anchoring“ of expectations is not yet happening, Kazimir said, but there are worrisome signs in wage-setting, which suggests that high energy costs are filtering through the economy.
Kazimir added that the ECB should fight unwarranted fragmentation among the debt markets of euro zone members but he opposed a general backstop or a pre-announced tool that would kick in automatically.
„I think we have the capacity to come up with a tailor-made tool if it’s needed; I don’t think we need to pre-announce details,“ he said.
Q&A’s
Q: May inflation figures just came out and showed yet another record high. What do you make of the figures?
A: Inflation is moving up as I’ve expected. The data, in my view, cement the necessity to take the first step in raising rates. We will take this step in July. How big? My baseline is 25 basis points. But I’m open to talk about 50 basis points. To be realistic, I expect that we will go with 25 in July, then the 50 basis points could be in September. What’s important for me is to start hiking in July. The time for waiting, lingering, is gone.
Q: What would it take for you to move towards 50 basis points In July, rather than September?
A: My baseline is 25. But we’ll have new data until then. We’re data-dependent and there is one more inflation figure (June inflation flash estimate).
Q: Inflation is obviously broadening. Do you see second round effects? Do you think de-anchoring is happening?
A: It is definitely broadening. In all items. But I don’t see de-anchoring yet. Still, we have to move to prevent de-anchoring. As for second round effects, I’m very concerned. When you look at developments in wage bargaining, for example, then we definitely get very concerned.
Q: What is your definition of the neutral rate?
A: For me it is crucial to exit the negative deposit rate as soon as possible. For me that means September at the latest. The neutral rate is somewhere between 1% and 2%. For me, it is closer to 2%. So, what is in front of us is about a 200 (basis) point journey.
Q: How long do you think this 200-basis point journey should take?
A: It will depend on incoming data. We could achieve it next year.
Q: Given where inflation is, and how broad it’s becoming, do you think getting to the neutral rate in itself is going to be enough?
A: It’s difficult to say now. We’ll have to assess data, but it seems to me now that it won’t be enough. That’s my reading of the situation right now. But this requires a discussion and I think it would be best for us just to be transparent about it. I think it’s important to show that we are not panicking and we are taking control of the situation with an approach of optionality and flexibility.
Q: Obviously, growth is going to take a hit from the (Ukraine) war. How does that figure in your own calculations?
A: That definitely is going to be the case. We will also see certain fragmentation. You see and will see different developments in the countries which are more hit by the war. But at the end of the day, our primary mandate is price stability.
Q: Do you see a risk of a recession?
A: No, definitely not in the euro zone. A short recession is possible in some countries hit more by the war, but I do not see a euro zone-wide recession.
Q: If you normalize gradually, when do you think inflation can return to target?
A: We don’t see it at target in 2024, so hopefully in 2025. In 2024 we could be very close to target, converging from above.
Q: President (Christine) Lagarde has made it clear that the ECB will fight unwarranted fragmentation. Do you agree with this? And what is your definition of unwarranted fragmentation?
A: I fully agree that euro area needs an anti-fragmentation tool, and maybe not just one, but several. But this should not be designed by the ECB. I think the main responsibility resides with elected representatives to come up with solutions that will boost resilience and fill the gaps in the euro zone architecture. It is for them to complete the banking and the capital markets union or the newly needed energy union. It is not in our capacity to deal with all the issues.
Q: As for the ECB, what should its role be?
A: I think it’s clear we have tools, we are quite experienced in this respect. We will come up with the appropriate mechanism. Also don’t forget that we also have the OMT (Outright Monetary Transactions) and I still believe in market discipline. I am personally against a general backstop, with automatic rules for engagement.
Q: Should the ECB pre-announce a specific anti-fragmentation tool?
A: I think we have the capacity to be to come up with a tailor-made tool if it’s needed; I don’t think we need to pre-announce details.
Q: When should the discussion start about ending Asset Purchase Programme (APP) reinvestments?
A: APP needs to end first! That’s the decision to take next week in Amsterdam. It’s clear it’s going to happen but it’s not on paper yet. It’s too early to talk about the timeframe for reinvestments. The pandemic hasn’t ended yet and there is also a war. So, it’s unclear what the environment will be in the autumn.
Q: Do you think the ECB should continue providing forward guidance?
A: After July, the current forward guidance will no longer be in force. Going forward, transparency and communication will play a crucial role.