ECB policymakers put 75 bps hike on table for October

FRANKFURT/HELSINKI  -The European Central Bank may need to raise interest rates by another 75 basis points at its October meeting and move again in December to a level that no longer stimulates the economy, policymakers said on Wednesday.

The ECB lifted interest rates by a combined 125 basis points at its past two meetings, the fastest pace of policy tightening on record, but inflation may still be months from its peak, pointing to even more tightening from a bank that started hiking well after most of its top peers.

“I have to say that 75 bps is a very good candidate for (our next move to) maintain the pace of tightening, but it is also necessary to wait for fresh data,” Slovak central bank governor Peter Kazimir told a news conference.

“We have to be vigorous, even ruthless, regardless of the looming recession,” Kazimir added.

Finnish central bank chief Olli Rehn, considered a moderate swing voter, also said that 75 basis points could be among the options.

“There is a case for taking a decision on another significant rate hike, be it 75 or 50 basis points or something else,” Rehn told Reuters without elaborating on what ‘something else’ may entail. “There is a stronger case for frontloading and determined action.”

Markets see the ECB’s 0.75 percent deposit rate rising to 2 percent by the end of the year, then to around 3 percent next spring. Inflation is forecast to stay above the ECB’s 2 percent target through 2024 and even longer term expectations are above target.

ECB President Christine Lagarde said the “first destination” in the rate hiking cycle will be the “neutral” rate, which neither stimulates not slows growth.

“We have return inflation to 2 percent in the medium term, and we will do what we have to do, which is to continue hiking interest rates in the next several meetings,” she told a conference.

While the “neutral” is a loosely defined concept, economists see it in the 1.5 percent to 2 percent range, a mark Rehn said should be hit this year.

“In my view, we are heading towards the range of the neutral rate by Christmas,” Rehn said. “Once we get there, we’ll see if there’s a case to move into restrictive territory.”

Kazimir added that there was consensus on the 25-member Governing Council that the “neutral” must be hit but there was no consensus on what precise level this meant.

As part of normalisation, Kazimir said the ECB could also start a debate this year on reducing its balance sheet but a discussion did not automatically mean that such action is imminent.