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ECB officials urge higher rates even as inflation retreats

Finance

European Central Bank officials called for interest rates to be lifted further — seeking additional reassurance on the inflation front as they look past more signs of weakness in the euro-zone economy.

Dutch central bank chief Klaas Knot said he’s “not yet convinced that the current tightening is sufficient,” telling lawmakers Wednesday in the Netherlands that “inflation could well remain too high for a long time and further rate hikes will then be necessary.”

Ireland’s Gabriel Makhlouf said “more work is needed from monetary policy in the short run,” while ECB Executive Board member Isabel Schnabel said there’s “more ground to cover” on borrowing costs. Exactly how much will depend on incoming data, Belgium’s De Tijd newspaper cited her as saying.

Numbers, of late, have provided grounds for optimism.

Both headline inflation and the core gauge that policymakers’ have increasingly used as their guide moderated by more than anticipated in May, while an ECB survey published Tuesday showed consumers’ expectations for the trajectory of prices easing significantly.

At the same time, Europe’s economic outlook is looking shakier. Greece on Wednesday revealed a surprise decline in first-quarter output — further weighing on the 20-nation euro area, which is already being dragged down by Germany’s recession.

The bloc will release an updated reading of its own first-quarter performance on Thursday, with a Bloomberg survey suggesting it will just avoid the fate endured by its biggest economy by stagnating.

ECB policymakers have, in any case, stressed that regaining control of prices is essential to put growth back on track. Investors and analysts still predict quarter-point rate hikes next Thursday and in July — bringing the deposit rate to 3.75% from below zero in July, the steepest rise in borrowing costs since the euro was introduced.

“A peak in underlying inflation would not be sufficient to declare victory: we need to see convincing evidence that inflation returns to our 2% target in a sustained and timely manner,” Schnabel said. “We are not at that point yet.”

In separate comments Tuesday, Knot said Europe is seeing second-round effects from higher energy costs — making it harder return consumer-price growth to the 2% target. He reiterated Wednesday that he’s “open minded” on the possibility of hiking in September.

“The fact that we’re seeing inflation fall is welcome,” Makhlouf said. But “it doesn’t confirm to us that we’ve now done what we need to do to get inflation down.”

© 2023 Bloomberg

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