The Zhitong Finance App learned that European Central Bank Management Committee member and Slovak Central Bank President Peter Kazimir said that if necessary, the ECB will not hesitate to further raise interest rates, but it will take time to determine the next steps.
Kazimir said in a column published on the Slovak Central Bank website on Monday: “We will make every decision when necessary, and we will not waver when the evidence requires action.”
However, he said that ECB officials first need to assess whether the indirect effects of the sharp rise in energy costs caused by the war are developing as expected, and “whether demand and labor market conditions are strong enough to produce a second round of effects.”
The ECB raised borrowing costs by 25 basis points to 2.5% last week. This is the second rate hike since the outbreak of the war in Iran, as another rise in oil prices has intensified inflation. Although the ECB has reiterated that it will not promise future policy measures in advance, rising inflation expectations and signs of resilience in Eurozone economic growth prompted the market to expect further tightening of policies. Traders are currently betting that the ECB will raise interest rates three more times until October 2027.
Kazimir said on Monday that the market “knows very well” how the ECB will respond to emerging information, which “creates valuable space for careful observation and judgment.”
“This allows us to act when necessary,” he said. He emphasized the ECB's flexibility after raising interest rates last week. “We shouldn't confuse being open to the next decision with hesitation.”
Inflation is still a “nail in the eye”, and expectations of ECB interest rate hikes are heating up
Kazimir believes that the risk of inflation is “clearly biased towards the upward trend”. Although stronger than expected economic growth is also driving up inflation, the main source of risk for rising prices is still energy. He added that he is paying more and more attention to gas and electricity.
“The longer energy costs continue to be high, the greater the risk that they will infiltrate long-term expectations, wages, and prices.” Kazimir said.
Gediminas Simkus, the governor of the Bank of Lithuania and a member of the ECB Governing Council, said that December may be a natural time to reevaluate the Eurozone economy, but we must pay close attention to energy prices before next month's meeting.
He said, “As early as October, we can evaluate the inflation outlook and determine whether it worsens or improves. I can't rule out the possibility of any particular meeting. We will make decisions based on upcoming data.”
ECB President Christine Lagarde also recently stated that inflation in the Eurozone will remain high for some time. “The current shock has lasted longer,” she said, and the Middle East conflict “continues. We expect energy price fluctuations and pressures to continue, although rising prices also risk slowing economic growth.”
ECB Governing Council member and Bundesbank President Joachim Nagel said on Friday that the ECB may need to tighten borrowing costs to a slightly tightened level to control price increases. After the interest rate hike last Thursday, deposit interest rates are 2.5%, and many, including chief economist Philip Lane, believe this level is close to the upper limit of the neutral range.
Traders have increased their bets on the ECB's interest rate hike in October. Currently, they think the possibility of a rate hike is as high as 70%, which is a little more than 50% before. Jefferies economist Modupe Adeghbembo said, “We are still inclined to raise interest rates in December, and possibly as early as October if energy prices continue to be high.”