(Bloomberg) -- The European Central Bank should consider raising interest rates by twice the planned amount next month if the inflation outlook deteriorates, according to Governing Council member Gediminas Simkus, as calls not to exclude an outsized initial move grow.
Simkus joined his ECB colleague Martins Kazaks in arguing that the baseline option for a quarter-point hike at the July meeting -- when policy makers are set to lift borrowing costs for the first time in more than a decade -- isn’t set in stone as record inflation must be fought “decisively.”
“Of course we should see some change in the data, some change in relation to what we have seen at the beginning of June,” Simkus said in an interview in Sintra, Portugal. “But if we see this change in data that points to the persistence of inflation, to its acceleration, 50 basis points should be a policy option for July.”
Such a risk could already be materializing, if increases in Spanish consumer prices are a guide. Inflation in the euro area’s fourth-biggest economy unexpectedly surged to a record in June, hitting 10% and defying government efforts to rein it in. Numbers for Germany are due later on Wednesday.
Simkus spoke on the sidelines of the ECB’s annual retreat, where officials are meeting against a backdrop of surging prices, threats to economic growth and the possibility of energy rationing as Russia cuts supplies.
President Christine Lagarde said Tuesday in a speech that policy makers are ready to step up action to tackle inflation if warranted, echoing the urgency of other central banks around the globe that have been far more aggressive on rates.
“With these levels of inflation and inflation being more and more broad-based, with wages growing in the euro area, we should move decisively toward monetary-policy normalization,” said Simkus, who heads Lithuania’s central bank. Risks to the outlook for prices are skewed to the upside, he said.
Inflation is driven to a large extent by energy and food costs linked to the war in Ukraine. But it’s broadening, and economists predict euro-zone data due Friday will show another pickup, to 8.5%, in June, though those estimates predate Wednesday’s Spanish figures.
After recent readings consistently surpassed estimates, Simkus said “I would be surprised not to be surprised” by the next one.
With the first rate hike approaching, investors are concerned about a repeat of Europe’s sovereign-debt crisis from last decade. Officials held an emergency meeting this month after Italian bond yields jumped, deciding to accelerate work on a new tool to address such turmoil.
It’s set to be presented in the coming weeks and will probably consist of more targeted bond-buying, though purchases may be offset to avoid undermining efforts to fight inflation.
“This instrument should deal with fragmentation issues and should not interfere with the monetary-policy stance,” Simkus said. “There are various ways how to solve this kind of issue.”
He called for the tool to be powerful enough to serve as a deterrent.
“Just having it should work in a way that does not allow for fragmentation,” Simkus said. “It should be credible and it should be of sufficient volume.”
There’s been speculation that countries would need to meet certain requirements before the ECB can intervene on bond markets in their favor. Lagarde said in her speech that there would be “safeguards” to make sure governments pursue sound fiscal policy.
Such terms “should be worked on,” Simkus said. “But it shouldn’t be the primary concern or the primary requirement to be conditional on something very hard as it could make the instrument unusable.”
(Updates with Spanish data in fourth paragraph)
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