Sep 28, 2022
ECB’s Kazaks Says Next Hike Must Be Big, Smaller Steps to Follow
(Bloomberg) -- The European Central Bank should raise interest rates by another 75 basis points when it next sets policy in October, with steps likely to get smaller after that, according to Governing Council member Martins Kazaks.
“In the current situation, we can still make big steps, and the next step still has to be big because we are still far away from rates that are consistent with 2% inflation,” Kazaks said Wednesday in an interview in Vilnius. “I would side with 75 basis points -- let’s take a bigger step and move the rates up faster.”
The Latvian official said that doesn’t mean “75 basis points is something standard from now onwards,” and that it’s likely that once rates are more consistent with the inflation goal, future steps “will need to become somewhat more cautious.”
His calls for forceful action were echoed by other officials from the Baltic region at a conference in the Lithuanian capital of Vilnius on Thursday. Inflation in the region currently tops 20%.
Speaking to Bloomberg Television he acknowledged that he plunge in the value of the euro “does worry me,” because “a weak euro does increase inflation.”
Soaring prices driven by Russia’s war in Ukraine and the resulting energy crisis has prompted ECB officials to start hiking rates for the first time in more than a decade -- this month by a historic three quarters of a point. They’re now weighing how to proceed as the ramp-up in prices is accompanied by ever-increasing predictions of a recession.
Traders currently lean toward a second 75 basis-point hike being delivered at next month’s meeting. An increase of that size would double the deposit rate to 1.5% -- the highest since 2009.
Kazaks said it’s likely borrowing costs will reach the “neutral” level that neither stimulates nor restricts the economy by year-end. ECB President Christine Lagarde told European Union lawmakers this week that officials will only begin to consider shrinking the trillions of euros of bonds it accumulated in recent crises once rates have reached that point.
“Internally of course we are -- and we should be -- discussing all the instruments so that when the decision needs to be made we are ready,” Kazaks said. But the ECB should “leave quantitative tightening for the next year.”
He admitted that some of the risks outlined in the ECB’s September economic projections -- which assumed the euro-area would only stagnate, rather than enter a downturn -- have already materialized.
“If we manage in Europe to evade this crisis spilling into recession I think that would be quite a success, but I think it will be extremely difficult,” he said. At the same time, he doesn’t expect the looming downturn to “solve the inflation problem.”
While he favors forceful action in the short term, Kazaks cautioned against acting too aggressively. He said, for example, that a 100 basis-point hike in October would be “a bridge too far.” That sentiment was echoed earlier Wednesday by top ECB hawk Robert Holzmann.
“Given that the major source of inflation is energy, which is of a geopolitical, structural nature, tightening monetary policy extremely rapidly, just to push the economy into recession would not be the reasonable choice,” Kazaks said.
(Updates with more Kazaks comments starting in seventh paragraph.)
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