Representatives of the European Central Bank (ECB) defended this Saturday a sharp increase in interest rates in September to combat runaway inflation. With this position, the ECB joined the path marked out the day before by the president of the Federal Reserve (Fed) of the United States, Jerome Powellwho opened the door to a third straight three-quarter point raise.
The ECB raised rates 0.5% to zero at the end of July — the first hike in 11 years — and a similar or even greater movement on September 8, partly because of high inflation and partly because the US Federal Reserve is also moving in exceptionally large steps.
During a meeting at the Fed’s annual Jackson Hole Economic Symposium, ECB counselor Isabella Schnabelthe governor of the Central Bank of France, Francois Villeroy de Galhauand that of the Central Bank of Latvia, Martins Kazaksdefended a forceful or significant action.
“Both the probability and the cost of the current high inflation becoming entrenched in expectations are uncomfortably high,” Schnabel said. “In this environment, central banks must act strongly.”
Increase of 0.75%
Markets were betting on a 50 basis point move on September 8 until just a few days ago, but a host of lawmakers, speaking on and off the record, are now arguing that a 0.75% hike should also be considered.
“The early distribution of rate hikes is a reasonable policy option,” Kazaks told Reuters. “We should be open to discussing both 50 basis points and 75 basis points as possible moves. From today’s perspective, it should be at least 50.”
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The three bankers also argued that rate hikes should continue.
With rates at zero, the ECB is stimulating the economy and staying away from the neutral rate, which economists estimate at around 1.5%. Villeroy said the neutral rate should be reached before the end of the year, while Kazaks said it would be reached in the first quarter of next year. “From my point of view, we could be there before the end of the year, after another significant step in September,” Villeroy said.