Big interest rate hikes still in play as Lagarde’s plan wins ECB backing

ECB President Christine Lagarde.

European Central Bank (ECB) colleagues lined up to back President Christine Lagarde’s plan to exit negative interest-rate policy by the end of the third quarter, though some stressed that more aggressive action can’t be ruled out.

Following initial noises of alarm from hawkish officials earlier this week that the ECB chief’s signal for two quarter-point rate hikes in July and September seemed to exclude bigger moves, several policy makers declared support for her roadmap.

They included two of Ms Lagarde’s executive board colleagues, who backed a timetable that also encompasses an end to bond buying in the weeks after the June 9 decision.

ECB Vice President Luis de Guindos told Bloomberg Television that the schedule was “very sensible,” while chief economist Philip Lane, the former Central Bank of Ireland governor, described it as “clear” and “robust policy”. 

Meanwhile, Dutch central bank governor Klaas Knot, a veteran hawk, declared that “I fully support everything that is in the blog” that Ms Lagarde wrote this week. 

He later added that raising rates by 50 basis points, or half a point, in July to reach zero immediately is “clearly not off the table” and insisted that option is consistent with her plan. 

Such an approach to tightening would echo the increased aggression against inflation the US adopted this month when it hiked by that amount. 

The ECB has taken longer to embrace tightening than global peers, maintaining that surging consumer prices are largely caused by supply shocks such as the spike in energy costs after Russia’s invasion of Ukraine. But surprisingly fast inflation of almost four times the 2% target has nudged officials to pledge action.

The flurry of remarks on Wednesday provided further evidence of how far the ECB’s discussion has progressed. Even normally more dovish policy makers such as Olli Rehn are seeking a rate hike in July, and the debate is now focused on speed, quantum, and even toward how high borrowing costs should ultimately rise. 

Already last week, Mr Knot broke ranks to air the possibility of raising rates by 50 basis points if the inflation outlook worsens. 

In interviews in recent ays, Latvia’s Martins Kazaks agreed such an increase could be discussed, while Austria’s Robert Holzmann insisted it’s already “appropriate.” 

-Bloomberg