The European Central Bank would eventually raise interest rates from lows in July but could outline its rates expectations for the coming months at its June 9 meeting, according to ECB policymaker Madis Müller -Estonia’s central bank governor.
The Euro Zone inflation is at a record high at 7.5% which is nearly four times the ECB’s target which is pressuring policymakers to cut back on stimulus and faster “normalization” including reduction of balance sheet and rates hike.
According to Estonia’s central bank governor, bond purchased needs to end in early July.
“We could even discuss if we should end purchases a few weeks earlier,” Müller said. “The real issue is interest rate increases and we shouldn’t have much of a delay there either.”
“The recent data confirm that the monetary policy stance is not appropriate given where inflation is and given inflation expectations,” Müller told Reuters in an interview.
The ECB could already send a strong signal on June 9 about the imminence of a rate rise which could be the first in over a decade.
“I’m not sure we should be deciding on interest rate hikes then (in June),” Müller. “But perhaps we could indicate our expectation for interest rates. From my perspective, we could focus the following meeting (on July 21) on interest rates.”
ECB board member Isabel Schnabel and Bundesbank chief Joachim Nagel, influential voices on the rate-setting Governing Council, have both made the case for a July rate increase, as did a host of other policymakers.
The first increase should then be followed by several more this year and the deposit rate, now at minus 0.5%, could be back in positive territory by the end of the year, Müller added.
“Even if we go by 25 basis point increments, we may get to a positive rate by the end of the year. For the time being, 25 basis points would be an appropriate increment.”
Markets currently price in 90 basis points of rate hikes for the rest of the year or between three and four 25-basis-point moves.
Müller said he was not worried about the widening spread between the yields of the bloc’s core and periphery since this was a natural, expected response of markets.
The bank should nevertheless contain any “unwarranted” widening of spreads, even if it should not pre-commit any new tool to tackle market turbulence.
“When it comes to specifying how such a tool would work, I’m not sure we can do that in advance,” Müller said. “It needs to be designed specifically to the nature of the situation at hand.”
