Two ECB hawks call for more rate hikes despite banking turmoil

By Francesco Canepa and Balazs Koranyi

FRANKFURT (Reuters) -The European Central Bank needs to keep raising interest rates because underlying price growth is sticky, two policymakers seen as hawkish said on Friday, amid continued turmoil in the banking sector.

The comments by Slovak central bank governor Peter Kazimir and his Lithuanian peer Gediminas Simkus appeared to challenge the ECB’s new official line – only a day old – that future decisions will depend on how the economy and markets develop.

That phrasing was published on Thursday to accompany a sixth consecutive rate hike by the ECB, which acknowledged the outlook had become more uncertain after the collapse of two banks in the United States and more problems at Switzerland’s Credit Suisse.

But Kazimir, who has often argued for higher rates to tame inflation now running at 8.5% in the euro zone, said the ECB should press ahead with more increases in borrowing costs.

“Even the current events on the financial markets do not change my view that we need to continue,” Kazimir said in a blog post. “I am very well aware of the delicacy of the situation … but we are not yet at the finish line.”

Fellow hawk Simkus also told reporters in Vilnius he believed that Thursday’s “was not the last rate hike”.

But neither policymaker made a case for a rate increase as soon as the next ECB meeting, and Kazimir said it was useless to speculate about the May 4 decision.

The ECB raised interest rates by 50 basis points on Thursday and projected inflation would remain above its 2% target through 2025, based on forecasts it said had been formulated before the U.S. bank failures triggered a huge selloff in lenders’ shares.

French central bank governor Francois Villeroy de Galhau said the hike reflected the ECB’s inflation-fighting priorities and signalled confidence in the solidity of European banks.

The ECB said on Friday that its Supervisory Board would hold an unscheduled meeting – its second this week – to discuss stress and vulnerabilities in the euro zone bank sector.

NO GUIDANCE

The ECB removed all guidance about further policy moves from its statement and did not provide its usual assessment of whether inflation and growth were more likely to come in higher or lower than expected.

Kazimir, by contrast, said upside risks dominated and that underlying inflation was “stubbornly sticky”.

“There are risks to inflation on both sides, but in my view, upward risks are much greater,” he said.

ECB President Christine Lagarde said during her news conference on Thursday that the euro zone’s central bank would have “a lot more ground to cover” in raising rates if its current forecasts held up.

Core inflation, which excludes volatile food and fuel prices, accelerated to 5.6% last month from 5.3%, indicating that past energy prices rises have seeped into the broader economy and inflation is at risk of becoming durable.

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