ECB likely to continue raising interest rates amid economic slowdown
SINTRA, Portugal, June 27 – The European Central Bank (ECB) is expected to persist in raising interest rates after its next meeting, despite a slowing economy, as inflation remains too high, according to ECB policymaker Martins Kazaks. Recent economic surveys reveal a worsening situation for the euro zone and Germany, due to higher borrowing costs and China’s underwhelming economic performance post-COVID curbs. However, Kazaks believes the euro zone economy will only slow or stagnate, not contract, and it will not hinder the ECB’s efforts against high inflation.
Persistence of high inflation justifies rate increases
“The softness of the economy is unlikely to deal with inflation, which is still very high, with strong risks of persistence,” Kazaks told Reuters. “In my view, we will still need to raise rates and I don’t think that in July we’ll be comfortable enough to say: ‘we’re done’.” The ECB raised the rate on bank deposits to 3.5% in June and is expected to push it to 4.0% by the end of the year, according to money market prices.
Market pricing expectations questioned
Kazaks disputed the market pricing’s expectation of rates decreasing rapidly. “The major problem with market pricing is the expectation of rates coming down so quickly,” he said. “In my view, it’s wrong and the reason is that the market must be pricing in a different macro scenario with inflation coming down much more quickly.” He added that the first rate cut will occur “much later” than anticipated, closer to the middle of its three-year forecast period.
Too early for bond sale discussions
Kazaks stated that it is “too early” to discuss selling bonds purchased under the ECB’s Asset Purchase Program in the last decade, but “there will need to be discussions” about it eventually.