MNI INTERVIEW: ECB's Simkus Says New Tool May Never Be Used

The European Central Bank should raise key interest rates by at least 50 basis points in September and possibly by the same amount in July, Bank of Lithuania Chairman Gediminas Simkus told MNI, adding that he hoped a proposed new tool aimed at capping yield spreads within the eurozone may never be used.

“A 50-basis-point rate rise might also become a policy option in July – but only if supported by incoming and substantially worsened data for inflation,” Gediminas Simkus said at the ECB Forum in Sintra,. “I think 50 basis points should be the baseline for September, assuming we don’t see any downward shocks to the inflation outlook by then, which I think is unlikely.”

But monetary policy will depend on how the economy performs and there is little point in speculating as to how high rates will eventually be raised in this cycle, Simkus said in an interview.

FRAGMENTATION FEARS

Simkus said there was still no sign that the transmission of monetary policy was being impeded by widening yield spreads within the eurozone. The ECB has said it is working on a tool to cap any unwarranted divergence in yields as it moves towards raising rates in July and September. (See MNI SOURCES2:ECB Mulls Crisis Tool As Officials Debate Spreads)

“The risk of market fragmentation does exist,” Simkus said, “therefore a new tool that can act as a backstop is appropriate. But we have not seen fragmentation yet, so any such tool is pre-emptive. Hopefully it won’t be needed to use.

“It’s important not to get bogged down in the details of [the new tool’s] design at the start of discussions. We should start first from principles. Above all, it should not interfere with the monetary policy stance.”