Policymakers at the European Central Bank see a growing risk of having to raise their key interest rate to 2% or more to curb record inflation in the euro zone, despite a likely recession. sources told Reuters.
With inflation hitting 9.1% in August and looking above the ECB’s 2% target for the next two years, the ECB has been raising rates at record speed and urging governments to help reduce energy bills, which have skyrocketed since Russia invaded Ukraine.
On Thursday, the ECB raised its deposit rate from zero to 0.75% and its president, Christine Lagarde, advocated another two or three hikes, saying rates are still far from a level that would bring inflation back to 2%.
Five sources close to the process said many policymakers see it as increasingly likely that the rate will have to be pushed into “tight territory,” slang for a rate level that causes the economy to slow, to 2% or more.
The sources, who spoke on condition of anonymity because policy discussions are private, said this is most likely to happen if the ECB’s first inflation projection for 2025, to be released in December, is still out. above 2%.
An ECB spokesman declined to comment.
The ECB currently expects inflation of 2.3% in 2024, although one source said an internal forecast presented at Thursday’s meeting put it closer to 2% after taking into account the latest gas prices.
Dutch central bank governor Klaas Knot and Belgium’s Pierre Wunsch were the first to openly talk about entering tightening territory late last month, at a time when most of their colleagues saw rates as only they had to return to between 1% and 2%.
The sources indicated that monetary authorities were bracing for a recession this winter and weaker economic growth next year than the ECB’s official projection of 0.9%. However, some were comforted by the strength of the labor market, which should cushion the impact of higher rates, they added.