ECB’s Kazaks rejects rate-cutting bets as underlying prices rise

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Martins Kazaks, a member of the European Central Bank’s Governing Council, rejects investors’ bets that the ECB will cut interest rates later this year, saying a deep recession would be needed to reduce borrowing costs.

Money markets expect the ECB to raise the rate it pays on bank deposits by almost 150 basis points by the summer, before reversing at the end of 2023 and next year, which would likely imply a slowdown in growth and inflation.

However, Kazaks told Reuters he saw no “raison d’être” for it and that rates should continue to rise to curb inflation, which in the euro zone is almost five times above the ECB’s 2 percent target.

“It would take a deep recession with a considerable increase in unemployment for inflation to sink and thus put downward pressure on rates,” the Latvian central bank governor said in an interview. “But that’s not likely, given the current macroeconomic outlook.”

Kazaks, widely seen as a supporter of aggressive monetary policy, added that rates should rise “into restrictive territory,” a loosely defined level holding back economic growth that most economists consider above the current rate of 2 percent.

Euro zone inflation fell to 9.2% last month, largely thanks to lower energy prices and a one-off subsidy in Germany, but underlying price pressures continued to rise.

Kazaks said core inflation, which excludes food and energy, is the measure to be monitored.

“Core inflation is likely to continue to rise even though headline inflation is falling, for example due to swings in energy prices,” he said. “In my view, core inflation is currently a key indicator of inflation persistence and policy decisions.”

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He declined to comment on the level at which rates should peak.

“The uncertainty is too high, and we will find it step by step,” he said.

The head of the Finnish central bank, Olli Rehn, as well as that of the Spanish central bank, Pablo Hernández de Dos, have also asked the ECB to raise rates “significantly” at its next meetings.

However, his Portuguese counterpart, Mario Centeno, has said the climbs are nearing their end.

Last month, the ECB slowed its interest rate hikes from 75 to 50 basis points, but announced more hikes of the same magnitude.

Since that meeting, speculation has grown about a slowdown in the pace of tightening as inflation slows in the euro zone and the United States.

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