Fiscal expansion risks forcing ECB into further rate hikes, says Kazaks

WASHINGTON (Reuters) – The European Central Bank is expected to continue to raise interest rates rapidly and expansionary fiscal policy around the 19-nation euro zone raises the risk that the bank will need to tighten further, the chief executive said on Thursday. Latvian central bank, Martins Kazaks.

The ECB is expected to raise its 0.75% deposit rate by 75 basis points on October 27 and is expected to opt for another big hike in December, the Kazaks told Reuters, joining a growing camp of policymakers advocating an oversized move. this month.

But the steps could become smaller later on while being complemented by other measures, such as reducing the ECB’s oversized portfolio of private and public bonds, he added.

“A big step at the next meeting is warranted and I think 75 basis points is appropriate,” Kazaks, who sits on the ECB’s rate-setting board of governors, told Reuters on the sidelines of IMF meetings. in Washington.

“In December we can also have a significant milestone, but whether it’s 50, 75 or something else is up for discussion,” he said.

The ECB has raised rates by a combined 125 basis points since July, the fastest pace of policy tightening on record, and markets see the deposit rate rising to around 2% by the end of the year and around 3 % next spring.

The Kazaks argued that governments should help the most vulnerable in society with targeted fiscal support, but there was now a risk that monetary and fiscal policies could work against each other.

Too much fiscal spending naturally drives up inflation and the Kazaks said there is now a risk that fiscal and monetary policies will run counter to each other.

“Fiscal policy should not add to inflationary pressures and that’s a fine line to tread,” Kazaks said. “Fiscal policy must be aware of its impact.”

“Governments need to help the less well-off part of society but must not overdo it because then we will have to raise rates further, which exaggerates the risks, for example in terms of financial stability.”

(Reporting by Balazs Koranyi; Editing by Hugh Lawson)