ECB Raises Interest Rates for Fifth Time, Further Hikes Expected to Bring Inflation to Target
The European Central Bank (ECB) has raised interest rates in the euro zone for the fifth time in a row, bringing the key interest rate to 3.0% and the deposit rate to 2.5%. ECB policymaker Klaas Knot noted that the headline inflation appears to have peaked, and may decline more quickly than the ECB had anticipated in its December estimates. ECB Executive Board member Isabel Schnabel said there’s been little effect to date from an unprecedented bout of monetary-policy tightening aimed at taming inflation.
Bundesbank President Joachim Nagel warned not to underestimate the inflation challenge, noting that more “significant” rate increases will be required. He said the risk of doing too little dwarfs the risk of overtightening policy. ECB policymaker Robert Holzmann echoed Nagel’s sentiments, saying, “The risk of over-tightening seems dwarfed by the risk of doing too little,” and that monetary policy must continue to show its teeth until we see a credible convergence to our inflation target.
ECB policymaker Martins Kazaks noted that “there will be a 50 bps rate hike in March barring a significant data shock.” This is consistent with the ECB’s recent shift in forward guidance from the ECB, which had raised expectations of three back-to-back 50bps hikes with one in February, one in March, and one in April.
Meanwhile, ECB Executive Board member Isabel Schnabel said that the ECB’s unprecedented monetary tightening to date has had little effect on prices, and that for inflation to fully normalize back to the ECB’s 2% target, some cooling in the economy and in the labor market is likely needed. She also noted that “rates must reach a sufficiently restrictive level” and that “we need to see robust evidence that underlying inflation returns to our target in a timely and durable manner.”
Overall, the ECB is looking to bring inflation back to its 2% target in a timely manner and is continuing to raise interest rates to do so. ECB policymakers are also warning of the risks of doing too little and are in agreement that further rate hikes are needed to achieve their goal.
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