European Central Bank policymaker Martins Kazaks believes that a euro zone recession is now very likely, but this will not be enough to bring down inflation and the ECB should implement further rate hikes next month.
The ECB raised rates by 50 basis points in July to zero and is expected to make a similar move at its next meeting on September 8th, but some voices within the bank are calling an even larger increase with the inflation outlook deteriorating.
“Frontloading rate hikes is a reasonable policy choice,” said Kazaks, Latvia’s central bank chief. “We should be open to discussing both 50 and 75 basis points as possible moves.”
The problem faced by the ECB is that inflation sits at 8.9%, over four times higher than the bank’s target and likely to still rise further.
Underlying inflation, which filters out volatile food and energy prices, is also well above targeted levels, indicating that some of the inflation is now getting embedded in the economy via secondary effects.
The ECB is still supporting the economy with zero-percent rates and Kazaks said the bank should reach the neutral level, which neither brakes not stimulates the economy, in the first quarter of 2023.
“If we see that we need to go beyond the neutral, I have no doubt we will,” he said. “If we don’t see significant decreases in core inflation, we may need to go beyond the neutral. But let’s not get ahead of ourselves.”
He added that the ECB should reduce its balance sheet at some point but, for now, the focus should remain on interest rates.