The European Central Bank’s chief economist has said it is expected to raise borrowing costs at a “steady pace”, casting doubts on its backing for calls for a record interest rate hike of 0, 75 percentage point next week.
Philip Lane said at an event in Barcelona on Monday that it would be best to “choppe” the expected trajectory of rate hikes over the next few months into “smaller increments” as that would give him time to “in know more” about the progress of the economy. .
His comments on Monday represent a slight pushback against more hawkish comments from other members of the ECB’s governing council, some of whom called anonymously to consider a three-quarters percentage point rate hike for the first time in its history. at next week’s meeting. .
However, economists noted that Mr Lane, a former governor of the Central Bank of Ireland, had left the door open for a more aggressive rate hike, as investors continued to price in a high probability of the ECB increasing its rate hike. deposit rate of a record 75 basis points. next week.
The pressure for a bigger cut came as German inflation accelerated to its maximum since the introduction of the euro in the face of soaring energy prices.
Consumer prices in Europe’s biggest economy, calculated using harmonized European Union standards, jumped 8.8% from a year ago in August, matching the estimate median from a Bloomberg analyst survey.
Food and energy costs led the advance, the German statistics office said on Tuesday, although their impact was partly offset by temporary government aid, including a fuel discount and ultra-low public transport. cheap.
On Tuesday, Slovenian Finance Minister Bostjan Vasle said he favored a rate hike next week that “could exceed 50 basis points, while his Dutch colleague, Klaas Knot, called for action.” fast and energetic.
The ECB raised rates for the first time since 2011 in July, taking its deposit rate out of negative territory to zero in a bigger move than it had signaled as it sought to bring inflation back towards its 2% target.
But inflation growth has consistently exceeded forecasts and on Wednesday consumer prices are set to set a new record high in the eurozone, hitting 9% when the latest inflation data is released by Eurostat, pulled higher. by record gasoline prices.
Mr Lane said inflation was ‘extremely high’ and ‘pay levels for many people may not be in line with costs, to put it mildly’, meaning ‘there is still future cost adjustments and that will keep inflation high for some time.”
The ECB’s chief economist, one of the more dovish members of the rate-setting board, said the central bank had entered “an important new phase” after exiting negative rates in which it identifies up to where she thinks rates need to go to bring inflation back. to its target — the so-called terminal rate.
“A steady pace (neither too slow nor too fast) to close the gap with the terminal rate is important for several reasons,” Lane said. Such a “calibrated” approach to rate hikes would allow markets to absorb higher borrowing costs and leave them room to target a lower terminal rate if the inflation outlook changes.
However, he did not express strong opposition to the idea of a larger rate hike next week, saying: “The appropriate size of individual increases will be larger, the wider the gap with the terminal rate. and the more skewed the risks to the inflation target.”
Frederik Ducrozet, Head of Macroeconomic Research at Pictet Wealth Management, said: “Inflation is likely to deteriorate, not improve, over the next two months. This should keep the 75 basis point option in effect [for the ECB].”
“At the start of Lane’s ‘new phase’, the gap between policy rates and the neutral rate is by definition larger,” Ducrozet added. “Therefore, I suspect he may not object to a 75 basis point move in September.” —Copyright The Financial Times Limited 2022/Bloomberg