SINTRA, Portugal (Reuters) – The European Central Bank will likely keep raising interest rates after its next meeting even as the economy slows because inflation remains too high, ECB policymaker Martins Kazaks said on Tuesday.
The latest economic surveys have painted a worsening picture for the euro zone and its economic powerhouse, Germany, which are starting to feel the effect of higher borrowing costs and China’s weaker than hoped for economic performance following the end of its COVID curbs.
But Kazaks, the Latvian central bank governor, said he expected the euro zone economy to simply slow or stagnate, rather than contract, and this should not stop the ECB in its fight against high inflation.
“The softness of the economy is unlikely to deal with inflation, which is still very high, with strong risks of persistence,” he told Reuters in an interview.
The ECB raised interest rates to their highest level in 22 years earlier this month and said a ninth consecutive rate hike was all but guaranteed in July as it predicted inflation to stay above its 2% target through the end of 2025.
Kazaks joined a growing group of policy hawks in predicting next month’s rate hike won’t be the last, arguing the risks of doing too little outweighed those of doing too much.
“In my view we will still need to raise rates and I don’t think that in July we’ll be comfortable enough to say: ‘we’re done’,” he said. “I think rates will need to be raised past July but when and by how much will be data dependent.”
The ECB increased the rate it pays on bank deposits to 3.5% in June and is expected to push it to 4.0% by the end of the year before turning back, money market prices show.
But Kazaks pushed back against market bets on rate cuts by the ECB in the first half of next year.
“The major problem with market pricing is the expectation of rates coming down so quickly,” he said. “In my view it’s wrong and the reason is that the market must be pricing in a different macro scenario with inflation coming down much more quickly.”
He added the first rate cut would come “much later” than the market is expecting, or towards the middle of its three-year forecast period.
“I’d see a need to cut rates when it becomes quite certain that inflation is about to start significantly and persistently undershooting our target of 2%,” he said. “And not at the end of the forecast period but towards the middle of the forecast period.”
Kazaks added it was “too early” to start discussing selling bonds bought under the ECB’s Asset Purchase Programme in the last decade but “there will need to be discussions” about it.
(Reporting By Francesco Canepa; Editing by Shri Navaratnam)
