Slovak central bank chief Peter Kazimir says the European Central Bank needs at least one more rate hike to contain inflation, and that the move is warranted even if the situation improves somewhat. He wants policymakers to move before second-round price effects turn visible, because they are costly to reverse by then. Markets price a 67% chance of a September hike.
The European Central Bank will need to raise interest rates at least once more to contain inflation, Slovak central bank chief Peter Kazimir said on Monday. A deterioration in the outlook could warrant more tightening than now expected, he added. Kazimir has been one of the most hawkish members of the Governing Council, and his latest remarks hold that line.
Second-round effects drive the case for September
Timing sits at the centre of his case for another rate hike. Second-round effects take hold quietly and become costly to reverse by the time they are fully visible, he argued, so the ECB should act before that point rather than after.
A key reason the bank held off this month was that the inflation surge has yet to generate any significant second-round price impacts, but Kazimir said policymakers needed to act preemptively. According to Reuters, he made the argument in an opinion piece: "This is warranted even if the situation improves somewhat." Only very convincing economic data and geopolitical developments in the coming weeks would stop him advocating a September move.
What markets are pricing
The ECB left rates unchanged last week but hinted at a hike at its next meeting in September, as oil and gas prices both surged this month on renewed conflict in the Middle East. Traders now price a 67% chance of a rate hike in September and a total of 38 bps of tightening by year-end. Reuters reports that financial markets see at least two more rate hikes, with the first move fully priced in by October and the second by March.
However, those expectations are highly volatile and move with oil prices, which now sit between the ECB's "baseline" and "milder" scenarios. Should price pressures escalate and turn stronger and more persistent, Kazimir said, the ECB would need to tighten more over the next quarters than is currently expected.
He framed the September decision as one markets should see coming, just as July brought no surprise.
Sources: InvestingLive, Investing.com
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