C Central Banks

ECB Members Warn Investors Against Betting on Early End to Interest Rate Hikes

10 May, 2023
European markets

The European Central Bank (ECB) has been facing a difficult balancing act of managing inflation while supporting the economic recovery. Three members of the ECB have recently shared their views on the need for further interest rate increases.

Bloomberg reported Governing Council member Martins Kazaks from Latvia believes that the ECB will need to continue raising interest rates beyond July to tackle inflation. He considers market bets for borrowing costs to be cut in the spring of next year as “significantly premature.” Similarly, Klaas Knot, another Governing Council member from the Netherlands, emphasized the need to raise borrowing costs as long as the underlying inflation hasn’t been tamed. He believes that the real problem at the moment is that core inflation is still too high.

More recently, Isabel Schnabel, an Executive Board member of the ECB, has called for more action to bring inflation back to the target of 2%. While she thinks that smaller interest rate increases are appropriate following the 375 basis points of hikes enacted since last summer, she emphasizes the need to raise interest rates with full determination until there are signs that core inflation is also falling on a sustained basis.

The ECB raised the deposit rate by a quarter-point to 3.25% last week, following three moves of double that size. ECB President Christine Lagarde has also signaled that there will likely be more interest rate hikes to come. However, the three ECB members’ views indicate that there is still a divergence of opinion on how much further interest rates need to be raised to tackle inflation.