Investing.com — The European Central Bank may have to raise its key interest rate above 3% to tame inflation that has been higher and more obstinate than expected this year, one of its top policymakers said on Thursday.
Belgian National Bank Governor Pierre Wunsch told CNBC in an interview that interest rates will have to rise above the rate of inflation at some point, although it wasn’t clear when that crossover will happen.
“You know, we’ve been claiming that what happens in Europe is different from the U.K. and the U.S., but over the last six months, basically, the direction we’ve been taking was not been that different,” Wunsch told CNBC, in a stark contradiction of the explanation repeatedly given by President Christine Lagarde for the ECB’s reluctance to tighten monetary policy as quickly as other central banks have.
“So my bet would be that it’s going to be over 2% and I would not be too surprised if it goes to above 3% at some point,” Wunsch added.
The ECB only ended an eight-year experiment with negative interest rates in July, raising its key deposit rate to 0% from -0.5%. It then raised it again in September by 75 basis points to 0.75% and flagged between three and four more rate hikes going forward.
Despite its action, the ECB’s interest rates are still deeply in negative territory once adjusted for inflation, which ran at 10.0% in September. The ECB expects inflation to average 5.5% next year and 2.3% in 2024.
Analysts have argued that the ECB’s scope for further interest rate hikes will be constrained by a sharp economic slowdown currently ongoing. Wunsch acknowledged that a recession in the Eurozone is fast becoming a “base case” scenario.
Reuters reported on Wednesday that the ECB is also likely to tighten conditions in the money market in another way at its October meeting, with a change to the rules of its ultra-long-term lending operations that could wipe millions of euros off Eurozone banks’ profits.
At present, banks are able to park money that they borrowed at around zero in so-called TLTRO operations back at the ECB’s deposit facility, earning a spread of 75 basis points for no risk at all.
Source: Economy - investing.com
