ECB’s Kazaks Says a July Interest-Rate Hike Is ‘Possible’
ECB Could Hike Interest Rates as Soon as July, Kazaks Says
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The European Central Bank may raise interest rates as soon as July amid “significant” inflation risks that will probably require further tightening later in the year, according to Governing Council member Martins Kazaks.
He said he wouldn’t challenge trader bets that the ECB’s deposit rate -- currently at a record-low -0.5% -- will increase to zero this year. There’s also no need for the rate to linger at this “magical number” for longer than necessary.
“A rate increase in July is possible, and I have no reason to disagree with what markets are pricing for the second half of the year,” Kazaks, who heads Latvia’s central bank, said in a Bloomberg interview. “We are on a solid path of policy normalization” where “we step-by-step gradually get to zero and then above.”
That view on the timing of the ECB’s first interest-rate increase in more than a decade was echoed by his German colleague Joachim Nagel, who said it may happen early in the third quarter.
The euro rose after the comments from Kazaks were published, and was up 0.7% at $1.0865 as of 4:45 p.m. Frankfurt time.
With euro-area inflation at a record 7.5% and rising, policy makers are pressing ahead with unwinding monetary stimulus this year. Money markets are betting on more than a 50% chance of a quarter-point rate hike by July, with 25 basis points of tightening baked in for September and December.
Still, the economic fallout from the war in Ukraine means officials are moving cautiously. Central banks in the U.S. and the U.K. are further ahead in removing crisis-era stimulus, which has exposed the ECB to criticism that it’s underestimating the inflation risks.
“Gradual doesn’t mean slow,” said Kazaks, who tends to have hawkish policy views. “It doesn’t mean being consciously behind the curve. No, it just means checking if taken policy measures are appropriate.”
Kazaks said that rate increases of 25 basis points “seem appropriate” for now, though policy makers can always discuss larger moves depending on the economic data. Current inflation readings mean the ECB shouldn’t wait for faster wage growth, and even a significant slowdown in price pressures or the economy would only delay, not derail, normalization, he said.
Policy makers have been adamant that one precondition for raising rates is halting a 2015 bond-buying tool, and that decision is on the agenda for their June 8-9 meeting. The sequencing was highlighted by Nagel on Wednesday.
“It seems that we’ll be able to conclude net purchases, possibly already at the end of the second quarter,” he told journalists in Washington. A rate increase could then happen “at the beginning of the third quarter, if you stick to the sequence that we agreed on.”
Bloomberg reported earlier this month that ECB staff is working on a backstop to use against debt-market stress. But Kazaks argued that there’s currently no need for new tools to ensure monetary policy reaches all parts of the 19-nation region.
“As far as I’m concerned, it’s sufficient to say ‘We will do what’s our task and we will deliver’,” he said. “We’ve done it before and we’ll do it again if needed.”
On the risks to the economic outlook, he pointed to remaining pandemic disruptions, supply chains and the war in Ukraine. He also said the economy is probably closer to the “adverse scenario” the ECB published in March, which foresees weaker growth and faster inflation this year, and the risk of a technical recession is “non-trivial.”
Like many of its European peers, the former Soviet republic of Latvia is trying to speed up efforts to wean itself off Russian gas. Kazaks said the region would benefit from a joint fund -- similar to the one created in response to the pandemic -- to help energy independence and investment in renewables.
“Sanctions on Russia are a necessary condition but for them to be efficient we ourselves need to change the ways we behave,” he said. “The challenge for Europe is to be able to switch away from Russian energy sources before Russia finds new ways to supply to other buyers.”
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