European Central Bank officials are starting to accept that interest-rate increases might need to continue in September to bring inflation fully under control, according to people familiar with the debate.
The ECB’s data-dependent approach means any views on what could happen in four months may easily shift. All the same, some policymakers from across the spectrum of the Governing Council are speculating that two further expected quarter-point hikes may not be sufficient to tame consumer prices, said the people, who declined to be identified because such discussions are private.
That would mean a possible third move when officials reconvene on Sept. 14 after their summer break, bringing the deposit rate to 4% from the current level of 3.25%. By then, they’ll have seen two more sets of forecasts, four further inflation readings and another quarterly bank-lending survey.
With the next ECB meeting still more than a month away, no decisions have been taken as policymakers keep open minds on the path of borrowing costs. Equally, there’s no sense of confidence that their tightening cycle is on the verge of a pause.
An ECB spokesperson declined to comment on Governing Council deliberations.
The euro held gains, trading 0.1% stronger at $1.0972. German government bonds and wagers on ECB rate hikes were little changed, with the market fully pricing in at least one more 25-basis-point increase this year.
Most economists see the ECB reaching a terminal rate of 3.75% in July. Danske Bank is among a small minority forecasting the deposit rate to reach 4% in September.
The most outspoken public hint so far from a Governing Council member came from Bank of Latvia chief Martins Kazaks, who said in an interview this week that investors shouldn’t assume ECB tightening will stop in July.
“I don’t think it is that clear yet,” he said. “We still have quite some ground to cover and further rate increases will be necessary to tame inflation.”
His views are often shared by his Baltic neighbors, who have leaned toward more hawkish policy as they confront inflation rates of more than twice the euro-area average.
Slovakia’s Peter Kazimir, another hawk, has said that the ECB will have to keep raising rates for longer than he had anticipated. At the other end of the spectrum, Greece’s Yannis Stournaras has declined to commit on an end point for rate hikes, telling a newspaper that hikes in borrowing costs will almost certainly conclude this year.
While President Christine Lagarde has refused to be drawn on how much further rates will have to rise — only indicating that at least two steps will be needed — she warned in an interview with Nikkei published on Wednesday that the inflation outlook continues to be too high for too long, highlighting “still significant upside risks.”
The ECB doesn’t project inflation to fall back to the 2% target until the second half of 2025, and Chief Economist Philip Lane said this week that there’s still “a lot of upward momentum” in prices.
Professional forecasters surveyed by the central bank see pressures receding more slowly, anticipating the rate to average 2.2% that year and 2.1% in the longer term.
--With assistance from Alexander Weber and Constantine Courcoulas.
(Updates with market reaction in sixth paragraph.)
