Exclusive: ECB Insider: ‘Very Unlikely’ That We Will Do More Than 25 Basis Points in July

15 July 2022

Exclusive: ECB Insider: ‘Very Unlikely’ That We Will Do More Than 25 Basis Points in July
- ECB insider: We committed ourselves strongly to 25 basis points in July already
- ECB insider: Still, if case is made that something changed significantly, then we could do more

By David Barwick – FRANKFURT (Econostream) – While nothing is excluded, the European Central Bank would, given its previous communication, jeopardise its consistency by moving next week by anything but 25 basis points, according to an ECB insider with whom Econostream spoke recently.

‘Particularly for September, nothing is written in stone, but for July, just because we have been so clear already in our communications - also in the last monetary policy statement I think it was indicated clearly enough that it’s going to 25 basis points - I think it’s just very unlikely that it will be more than that’, he said.

‘Personally, if there were still an open discussion, I would also perhaps support the higher hike, but … I think we just committed ourselves strongly to 25 basis points in July already, so that’s why I feel it doesn’t make sense to even argue for 50’, he added.

Still, in addition to his own sympathies for more than 25 basis points this month, this person left the Governing Council a key escape hatch via which to surprise. Asked whether the ECB mightn’t react with a bigger step to evidence, for example, that inflation expectations were no longer well anchored, he replied that ‘[i]f one can really make the case that something has changed significantly from what we know now, then of course we could.’

In the few days since this person spoke, the euro has weakened significantly further, a development arguably constituting additional wind in the sails of those Council members pining for a larger July rate hike.

However, for him the ‘starting point’ was ‘that we have already committed more or less to 25 basis points in July’, leaving it ‘more of a question what comes after’, he said.

As for the next rate hike after July, ‘the problem is that there’s so much time until September’, he said, meaning that the way forward was subject to change.

He was dismissive of the idea of a September move of an odd magnitude, in particular between 25 and 50 basis points, calling it ‘a possibility’, but showing a clear lack of enthusiasm. ‘I would be in favour of 50 in that case’, he said.

As for doing yet more than 50 basis points in September, ‘I don’t know’, he said. ‘I don’t want to exclude anything. But it’s just that that’s the most likely outcome for me at this point: 25 in July and I think we could get to 50 in September.’

The ECB’s ability to unveil an anti-fragmentation programme did not necessarily support doing more than currently envisaged by mitigating the potential obstacle of an adverse market reaction to rate hikes, he suggested.

‘That’s an argument’, he said. ‘I think it’s important for many Council members as well that with the help of such a possible additional instrument, you can afford to maybe more confidently hike rates. So, I don’t know if it allows for even higher or even faster rate hikes, or just allows for what we are [already] considering … There might be different views on that.’