ECB divided on whether to continue raising interest rates after summer

European Central Bank policymakers are divided over how long they will need to keep raising interest rates after their next policy meeting to combat extremely high inflation.

Bundesbank President Joachim Nagel, one of the more bullish members of the ECB Council, said there was still a “long way to go” to reach the central bank’s inflation target of 2 percent, even as rate-setters raised the benchmark. Deposit rate has been increased by one fourth. At 3.5 per cent on Thursday – its highest level since 2001.

“We may need to raise rates after the summer break,” Nagal said. Said In a speech in Amsterdam.

His comments were far higher than those of ECB President Christine Lagarde Press conference That followed Thursday’s decision, in which he said only that rate-setters were “very likely” to raise rates again in July.

While other council members agreed official borrowing costs may need to rise beyond September, French central bank governor François Villeroy de Galhau has pushed back against the increasingly bullish mood.

“Nobody should jump to premature conclusions about our calendar nor about our terminal rate,” Villeroy said. ,

“We are data driven, we are not forecast driven,” he said, pointing to signs that eurozone inflation may have peaked and “underlying price pressures are softening” as evidence that the ECB’s recent tightening policy is working. Was getting it done.

However, Pierre Wunsch, head of Belgium’s central bank, said that if core inflation, which excludes volatile energy and food prices, continues to rise at an annual rate of around 5 percent “we will see a further reduction in (interest rates) from September”. Will increase”.

Slovenian central bank boss Boštjan Vasle, also one of the ECB’s more hawkish council members, said a September rate hike was possible “if it turns out that inflation is more stable than it is at the moment”.

While eurozone inflation has fallen from a peak of 10.6 percent in October to 6.1 percent in May, it remains well above the central bank’s 2 percent target. The ECB’s new quarterly forecasts, published on Thursday, show officials expect the headline rate of inflation and the key rate to remain above 2 percent until at least 2025. The core rate stood at 5.3 per cent in May.

The hawkish projections led economists at several major banks – including Goldman Sachs, JPMorgan, UniCredit and BNP Paribas – to change their bets on how much eurozone rates would rise. They now expect two more interest rate hikes, above earlier expectations that the central bank would halt its tightening cycle in July.

“Updated inflation projections point to a higher barrier to ending the hiking cycle in July,” said Sven Jari Stein, chief European economist at Goldman Sachs.

Some economists said the ECB’s new growth forecast was too optimistic, especially after the eurozone economy shrank in the past two quarters. The ECB said on Thursday it expected to expand by 0.9 percent in 2023, down from an initial forecast of 1 percent growth.

Holger Schmiding, chief economist at German bank Berenberg, said: “If core inflation continues to decline slightly in the coming months, as we expect, and if real economy data is in line with our call for 0.3 per cent growth.” In 2023, the ECB will likely remain in September.

The IMF warned on Friday of “persistently high” eurozone inflation and called for more rate hikes, saying it would be needed over a “sustained period”. Eurozone member states must also rein in their budget deficits, the IMF said in a report on the bloc’s economy.

European Central Bank policymakers are divided over how long they will need to keep raising interest rates after their next policy meeting to combat extremely high inflation.

Bundesbank President Joachim Nagel, one of the more bullish members of the ECB Council, said there was still a “long way to go” to reach the central bank’s inflation target of 2 percent, even as rate-setters raised the benchmark. Deposit rate has been increased by one fourth. At 3.5 per cent on Thursday – its highest level since 2001.

“We may need to raise rates after the summer break,” Nagal said. Said In a speech in Amsterdam.

His comments were far higher than those of ECB President Christine Lagarde Press conference That followed Thursday’s decision, in which he said only that rate-setters were “very likely” to raise rates again in July.

While other council members agreed official borrowing costs may need to rise beyond September, French central bank governor François Villeroy de Galhau has pushed back against the increasingly bullish mood.

“Nobody should jump to premature conclusions about our calendar nor about our terminal rate,” Villeroy said. ,

“We are data driven, we are not forecast driven,” he said, pointing to signs that eurozone inflation may have peaked and “underlying price pressures are softening” as evidence that the ECB’s recent tightening policy is working. Was getting it done.

However, Pierre Wunsch, head of Belgium’s central bank, said that if core inflation, which excludes volatile energy and food prices, continues to rise at an annual rate of around 5 percent “we will see a further reduction in (interest rates) from September”. Will increase”.

Slovenian central bank boss Boštjan Vasle, also one of the ECB’s more hawkish council members, said a September rate hike was possible “if it turns out that inflation is more stable than it is at the moment”.

While eurozone inflation has fallen from a peak of 10.6 percent in October to 6.1 percent in May, it remains well above the central bank’s 2 percent target. The ECB’s new quarterly forecasts, published on Thursday, show officials expect the headline rate of inflation and the key rate to remain above 2 percent until at least 2025. The core rate stood at 5.3 per cent in May.

The hawkish projections led economists at several major banks – including Goldman Sachs, JPMorgan, UniCredit and BNP Paribas – to change their bets on how much eurozone rates would rise. They now expect two more interest rate hikes, above earlier expectations that the central bank would halt its tightening cycle in July.

“Updated inflation projections point to a higher barrier to ending the hiking cycle in July,” said Sven Jari Stein, chief European economist at Goldman Sachs.

Some economists said the ECB’s new growth forecast was too optimistic, especially after the eurozone economy shrank in the past two quarters. The ECB said on Thursday it expected to expand by 0.9 percent in 2023, down from an initial forecast of 1 percent growth.

Holger Schmiding, chief economist at German bank Berenberg, said: “If core inflation continues to decline slightly in the coming months, as we expect, and if real economy data is in line with our call for 0.3 per cent growth.” In 2023, the ECB will likely remain in September.

The IMF warned on Friday of “persistently high” eurozone inflation and called for more rate hikes, saying it would be needed over a “sustained period”. Eurozone member states must also rein in their budget deficits, the IMF said in a report on the bloc’s economy.