ECB’s Kazāks: ‘It Is Clear That Interest Rates Will Have to Rise Much Higher’

3 November 2022

By David Barwick – RIGA (Econostream) – The European Central Bank still needs to hike official borrowing costs by a lot and should therefore continue implementing rate increases into next year, according to ECB Governing Council member Mārtiņš Kazāks on Thursday.

In a speech at a conference of Latvijas Banka, which he heads, Kazāks said that ‘demand side factors have been becoming more prominent’, citing continued support from Covid fiscal measures, strong labour markets and wage pressures that ‘show no signs of easing’, but rather to some extent on the contrary.

So whilst expectations have remained ‘largely’ anchored, ‘[t]he risk of them de-anchoring remains non-trivial’, he said.

And even if ‘recession in the euro area is already a baseline scenario’ in his view, he said, at this point the downturn appears likely to be short and shallow and thus ‘unlikely to break the backbone’ of high inflation.

‘It is clear that the interest rates will have to rise much higher’, he said. In the ECB’s pursuit of normalisation, ‘there’s no need to pause at the turn of the year’, he said.

Still, he said, rate hikes of 75bp are ‘not a permanent benchmark’, he said. ‘At some point, rate hikes will need to become smaller, but they will have to be complemented by other monetary policy tools.’

The ECB’s modification of the conditions of its TLTROs, announced last week, represents a ‘first step’ in this direction, he said. A reduction of the balance sheet via the APP, which he urged take place ‘soon’, would be another. Quantitative tightening would have to be ‘cautious at first’, he said.