By David Barwick – VILNIUS (Econostream) – A 25bp June interest rate hike by the European Central Bank would be prudent and a second tightening move thereafter is more likely than not, according to ECB Governing Council member Gediminas Šimkus, who said that policymakers should gather additional evidence after June rather than feel compelled to tighten again immediately.

In an interview with Econostream on Thursday (transcript here), Šimkus, who heads the Bank of Lithuania, said that the scenarios that would prevent him from supporting a hike at the Governing Council's meeting in two weeks were improbable.

“I do not think we are likely to see better news on the inflation front that would remove the case for hiking in June,” he said. “So, the scenarios that would lead me not to support a hike are unlikely.”

Šimkus also indicated that he did not view June as a one-off “insurance hike,” arguing that policymakers were facing price pressures even though hard data remained limited.

“At the moment, we still do not have much hard data on inflation,” he said. “But we have quite a lot of market-based and survey-based data, and these clearly point to a more inflationary environment.”

Despite the prospect of further tightening, monetary policy was not currently tight, he suggested.

“When you look at real short-term interest rates, they are accommodative,” he said. “A hike is needed to contain inflationary pressures and avoid second-round effects.”

While backing June action, Šimkus indicated that the ECB should not rush into setting expectations for the meeting after that.

“After the first move, I think it is right to collect more data and not feel constrained by a very limited timeframe to act again immediately,” he said.

New staff forecasts due in September would provide a broader basis for judgment, he observed.

Although declining to commit to any specific meeting thereafter, Šimkus said he currently leaned toward expecting another rate increase.

“I still think a second hike is more likely than not,” he said. “But I do not think we are now in a position to say whether it would be July, September or October.”

The case for acting reflected, among other things, developments in inflation expectations, he made clear, noting that short-term expectations had “moved quite a bit.” He cited increases in consumer price expectations and selling-price expectations across several sectors.

“If you look at the data, consumer price expectations for the next 12 months in the ECB Consumer Expectations Survey have gone up,” he said. “Selling-price expectations in industry, retail trade, services and construction have also gone up.”

At the same time, he stressed the importance of preventing those developments from becoming embedded in wage- and price-setting behavior.

“One thing we do not want to see is this transmitting into wages,” he said. “We do not want companies to move into repricing mode, or workers to demand higher wages because they see higher prices in food stores and utility bills.”

“Prudence means a timely hike now, to contain inflation pressure, prevent second-round effects and interrupt a price-wage spiral,” he said.

The likely economic effects of moderate additional rate increases should not be exaggerated, he said, arguing that “[a] 25bp hike is still limited, relative to the economy as a whole.”

Markets had already incorporated much of the expected tightening, he said.

“So, I would not overemphasize the direct impact on the economy of a 25bp hike, or even of 50bp of tightening over the course of this year, for which the same argument applies,” he said.

The Governing Council was not, however, in a position where a larger move was warranted, he said.

“I do not think we are in that situation,” Šimkus said when asked about the possibility of a 50bp hike in June. “We have considerably more market-based and survey-based information than hard data, and the evidence of second-round effects is still very limited.”

Someone at the Governing Council meeting might wish to discuss the possibility, he said. “But I personally think 50bp at this point would be too much. We don’t have to catch up.”

Looking ahead to the June projections, Šimkus said current market developments pointed to somewhat higher inflation and somewhat weaker growth than previously anticipated.

“Oil futures are above the level seen in March, but below the adverse scenario,” he said. “Gas prices are around the March levels. The interest rate path is similar. PMIs for May indicate a weaker economy.”

“That all points in the direction of a little bit more inflation and a little bit less growth,” he said.