MNI INTERVIEW: ECB's Simkus Open To December 50bp Hike

The European Central Bank could get away with hiking by 50 basis points at its Dec 15 meeting, though more evidence of high inflation could call for 75 basis points, Bank of Lithuania president Gediminas Simkus told MNI.

“We definitely need a 50bps hike, but do we need 75bps? At the moment it would be premature to make that judgment,” Simkus said in an interview on the sidelines of an Austrian National Bank conference in Vienna.

“We might see another high level of headline inflation for November, but the question is whether the alleviating effects of lower energy prices will kick in and have a dampening effect on inflation soon enough. That’s what’s more important for decision-taking.”

A 50bp-hike taking the deposit rate to 2% would place the ECB in the middle ground between accommodative and restrictive policies, Simkus said, although he declined to comment on where the potential cycle peak for rates.

“From my perspective this is not such a relevant question until we have the inflation projections going to 2% in the medium term,” he said. “I continue to think that even if we might see that headline inflation has peaked, maybe in the last month, it will stay high. And I don’t think core inflation will come down that easily.”

Wages have yet to increase substantially, Simkus said, but are building, and will contribute to both headline and core inflation.

The overall pace at which core inflation falls will depend to a large degree on fiscal policy, he said, adding “but I would say that we would expect to see monthly core inflation peaking maybe early next year, and then going down.” (See MNI INTERVIEW: ECB To Consider Smaller December Hike - Lane)

QUANTITATIVE TIGHTENING

With an announcement on the basic principles for reducing the size of the ECB's bond portfolio expected following the December meeting, Simkus said it should be “should be prudent, it should be cautious, not hasty, but rather sooner than later.”

There are various options for tightening, Simkus said, pointing to the likely starting point of ceasing to reinvest bonds acquired under the Asset Purchase Programme, and, at some point later, doing the same with the Pandemic Emergency Purchase Programme.

“We have APP reinvestments, and at some point in time we have PEPP reinvestments,” he said. He added: “Excess reserves and excess liquidity is substantial in the banking industry, and this is something that may well end up also in discussions in the Governing Council. But at the moment, in this very stormy, gloomy, uncertain environment, I don't think we should pre-commit too much.”

With Lithuanian year-on-year inflation coming in above 23% last month, the country's chances of going into technical or mild recession have increased, Simkus said. Nevertheless, upside surprises cannot be ruled out, following better-than-expected activity data in Q2 and Q3 2022, and a still very active labour market.

“There could be a small positive upside surprise to growth,” he said. “Even if in the fourth quarter of 2022 growth is at zero, annual growth will be close to 3%. However, let’s be realistic: risks to the economy are on the downside.”