ECB’s Kazaks Says Rate Peak Is Impossible To Identify Right Now
The European Central Bank must raise interest rates much further, but it’s impossible to say how far.
(Bloomberg) -- The European Central Bank must raise interest rates much further, but it’s impossible to say how far because economic uncertainty is too high, according to Governing Council member Martins Kazaks.
“Nobody at the moment can know with any precision where exactly the terminal rate will be,” Kazaks said in an interview in Riga. Borrowing costs “are still way below where they should be” and must move to levels that equate to monetary tightening, not just a withdrawal of stimulus, he said.
The ECB doubled its key rate last week as it seeks to wrest back control of the fastest inflation since the euro was introduced. The onset of a recession in the 19-nation bloc could dent that enthusiasm, though data this week showed stronger-than-expected expansion in the third quarter alongside a new all-time high for price growth last month.
Kazaks, who heads Latvia’s central bank, is part of a hawkish group of ECB officials that’s helped lift borrowing costs by two percentage points from July, when they were below zero. Policy makers in Frankfurt also have an eye on the Federal Reserve, which hiked by three-quarters of a point for a fourth straight meeting on Wednesday.
Most analysts predict a 50-basis-point move when the ECB meets on Dec. 15. Kazaks said a third straight 75 basis-point move remains a possibility, but steps could also become smaller if other tools -- like a reduction of the central bank’s massive bond portfolio -- are gradually activated.
“If you start complementing -- and I think they are compliments, the rate increases with other instruments -- of course that is one aspect to take into account,” Kazaks said. “If we broaden the range of instruments, then perhaps the rate increase can step down at some point, become smaller.”
President Christine Lagarde has said that “key principles” of so-called quantitative tightening may be agreed on at the ECB’s last meeting of the year. Kazaks said the process should already begin in early 2023.
“In the first quarter, I think, would be an appropriate time to start cautiously, gradually rolling down the balance sheet for the asset-purchase program,” he said.
When deciding when to stop raising interest rates, policy makers will have to look at a “broader scope of indicators,” according to Kazaks.
“Core inflation is important to see that it has turned and it starts to come down,” he said. It’s also key to see inflation expectations “solidly anchored around 2%,” while wage developments will also be taken into account.
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