ECB will continue to hike rates to slow inflation, Kazaks says

The euro-area economy grew slightly less than initially estimated in the second quarter as signs continue to emerge that momentum is unravelling. Picture: Alex Kraus/Bloomberg

The European Central Bank will continue to hike interest rates, according to Governing Council member Martins Kazaks.

“At the moment what we see is that that inflation is unacceptably high, in Latvia above 20%,” Kazaks said in an interview with Latvia’s TV3.

“Monetary policy already from last December became more restrictive: In the beginning, we were decreasing support programs and in the past few months also significantly increasing interest rates and we will continue to increase interest rates with the goal not to allow inflation” to become entrenched, he said.

Kazaks, who heads Latvia’s central bank, also said that it would be more painful to let inflation continue. “To fight inflation you need also fiscal policy and structural policy,” he said.

The euro-area economy grew slightly less than initially estimated in the second quarter as signs continue to emerge that momentum is unravelling.

Output rose 0.6% from the previous three months between April and June, compared with a preliminary reading of 0.7%, Eurostat said Wednesday. Employment, meanwhile, climbed 0.3% during that period.

While the data still suggest Europe’s economy was on a relatively firm footing coming into the summer, analysts worry that energy shortages will drive record inflation higher still, tipping the continent into a recession. 

A downturn lasting two quarters is now more likely than not, according to a Bloomberg survey, which puts the probability at 60%.

Meanwhile, euro zone government bond yields rose on Thursday after European Central Bank board member Isabel Schnabel fuelled inflation angst by saying consumer prices could still accelerate in the short term.

The inflation outlook has failed to improve since a July rate hike, Schnabel said, suggesting she favours another large interest rate increase next month. 

The bloc's borrowing costs jumped on Wednesday on inflation fears after UK price growth hit double digits, shifting investors' focus away from less monetary tightening due to recession risks.

• Bloomberg and Reuters