Rising Inflation in EU reduces hopes for ECB rate cut
2023.01.13 02:28
Rising Inflation in EU reduces hopes for ECB rate cut
By Kristina Sobol
Budrigannews.com – Investors are betting that the European Central Bank (ECB) will cut interest rates by the end of the year, but European Central Bank policymaker Martins Kazaks says it will take a severe recession for borrowing costs to drop.
The money markets anticipate that the European Central Bank (ECB) will increase the rate it charges on bank deposits by nearly 150 basis points by the summer and then reverse course in late 2023 and the following year, likely implying a decline in growth and inflation.
However, Kazaks stated to Reuters that there was no “rationale” for that and that rates should continue to rise to reduce inflation, which is nearly five times the ECB’s target of 2% in the euro area.
In an interview, the head of the Latvian central bank stated, “It would take a deep recession with a sizeable jump in unemployment for inflation to sink and thus push for rate cuts.” However, given the current macro outlook, that is unlikely.”
The Kazaks, who are generally regarded as policy hawks, stated that interest rates ought to rise “well into restrictive territory.” This is an ill-defined level that stifles economic growth and is thought by the majority of economists to be higher than the rate of 2% at the moment.
Inflation in the Eurozone fell to 9.2% last month, largely due to lower energy costs and a one-time German subsidy, but overall prices continued to rise.
According to Kazaks, the metric to watch was core inflation, which does not include energy and food.
He stated, “It is possible for core inflation to continue trending up even as headline inflation is coming down, for example, due to swings in energy prices.” “Headline inflation is coming down,” he added. Core inflation, in my opinion, is currently an important indicator of inflation persistence and policy choices.”
He would not speculate on the point at which rates ought to reach their highest point.
He stated, “Uncertainty is too high, and we will find it step by step.”
Olli Rehn, the head of the Finnish central bank, and Pablo Hernandez de Dos, the president of Spain, have also urged the ECB to raise rates “significantly” during its upcoming meetings.
However, their Portuguese counterpart Mario Centeno has stated that the increases are about to end.
The European Central Bank (ECB) slowed down its rate of interest rate increases to 50 basis points from 75 last month, but it still hinted that it would make additional increases of the same magnitude.
As inflation slowed in the Eurozone and the United States since that meeting, speculation about a slowing of the pace of tightening has increased.
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