The ECB must increase the reference interest rate in the euro area again

The ECB raised its key interest rate by 0.50% in July, and a similar measure is expected on September 8, but some experts have started talking about an even bigger increase as the outlook for inflation deteriorates.

“The anticipated extension of the rate hike is a reasonable political choice,” Kazaks, head of Latvia’s central bank, told Reuters. “We should be open to discussing both 50 and 75 basis points as possible moves.”

“From the current perspective, it should be at least 50,” Kazaks said in an interview on the sidelines of the US Federal Reserve’s Jackson Hole Economic Symposium.

The problem is that, at 8.9%, inflation is more than four times the ECB’s target and is still likely to rise before a slow retreat.

With interest rates at zero, the ECB continues to support the economy, and Kazaks said the bank should reach the neutral level, which neither slows nor stimulates the economy, in the first quarter of next year.

“If we see that we need to go beyond the neutral level, I have no doubt that we will,” he said. “If we don’t see significant declines in core inflation, we may need to go beyond the neutral level. But let’s not rush.”

He added that the ECB should reduce its balance sheet at some point, but for now it should focus mainly on interest rates.

One complication for the bloc is a looming recession, largely due to rising energy prices fueled by Russia’s war in Ukraine.

“With this high inflation, avoiding a recession will be difficult, the risk is substantial, and a technical recession is very likely. In Latvia, a recession is part of a baseline scenario,” added Kazaks.

(source: AFP)

Source: Jurnalul by

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