In an interview to German newspaper Handelsblatt, Isabel Schnabel, a board member on the European Central Bank said, the ECB may have to raise interest rates as early as July to stop “extremely high” inflation from getting entrenched.
In March, inflation in Europe hit a record high 7.5%, nearly four times the ECB’s target; even if you were to factor in the underlying price growth, which filters out volatile energy and food prices, inflation in Europe is now approaching 4%, suggesting that high prices of commodities could continue to prevail even if oil prices were to retreat.
“Talking is no longer enough, we need to act,” said Schnabel. “From today’s perspective, a rate increase in July is possible in my view.”
“A precursor to any rate hike must be the end of bond purchases, and this could come at the end of June,” said Schnabel, who is the ECB’s head of market operations.
Conservatives on the ECB’s 25-member Governing Council have been increasingly calling on the central bank to curb its ultra-easy policy to combat inflation, and most see two to three rate hikes before the end of the year.
The last time the ECB had raised interest rates was in 2011; its benchmark deposit rate is now at minus 0.5%; it has been in negative territory since 2014.
Markets currently price 97 basis points of rate hikes for the rest of the year, indicating that increases are expected in each policy meeting from July onwards.
The ECB is scheduled to meet on June 9, when asset purchases are set to ended; its next meeting is on July 21.
According to Schnabel, while the Eurozone may not fall into stagflation, a period of zero growth coupled with high inflation, the ECB’s main role is to fight the rapid increase in prices and not to prop up the economy.
The ECB would act on any unwarranted increase in the spread of yields between the bloc’s core and periphery, said Schnabel.