MNI SOURCES1: ECB Seen Making Two To Three 25-BP Hikes In 2022

A majority on the European Central Bank’s Governing Council is prepared to back at least two 25-basis-point rate hikes this year, with some leaving the door open to three as part of a move towards neutral settings, Eurosystem sources told MNI, with several officials downplaying a call by the Dutch central bank chief for a possible 50-basis-point increase if inflation continues to worsen.

Various senior ECB officials, including the governors of the Bank of France and the Bank of Finland, have called for rates to be back at positive levels by the end of the year. Klaas Knot of the Netherlands went further in a TV interview on Tuesday, saying that there should not only be a 25-basis-point increase in July but that a 50-basis-point hike in the deposit rate in coming months from its current -0.5% might be appropriate if the price outlook deteriorates further.

Knot is not close to the centre of gravity within the ECB, sources from various parts of the hawk-dove spectrum said.

“A 25-basis-point hike for July and a 25-basis-point hike in September I expect. That gives options over further hikes or not in October and December,” one official said. “I suppose it’s fair for Knot to say flexibility and optionality will mean 50 basis points can be introduced into the discussion at some point if pressures pick up and broaden, but so can zero, it’s part of the debate.”

TWO HIKES MAINSTREAM OPINION

Another source from a different national central bank agreed.

“There should be at least two hikes, that would be our position. And it might seem at the moment that this could be the mainstream opinion,” one source said. “There will be a hike maybe in July, and then maybe another one in October or November if necessary. But I think most members assume a second time, then maybe there might be a third one at the end.”

Other sources were sceptical that a 50-basis-point move later this year could gather support in the Governing Council, with one saying that Knot may be trying to drive market rate expectations higher in an attempt to drag the ECB in a more hawkish direction. A 50-basis-point hike would also require prior signalling, or it could have an outside effect on the long end of the yield curve, another source said.

Knot has also expressed concern about the depreciation of the euro, telling MNI in an interview earlier this year that the ECB should guard against excessive currency weakness. (See MNI INTERVIEW: ECB Should Guard Against Euro Weakening-Knot)

But other officials were more sanguine about the exchange rate, now trading at around USD1.05.

“There is no level of the euro-dollar that is going to set off the alarms,” one official said, though acknowledging the “brutal” spillover effects of the falling exchange rate on inflation. “There is no threshold. For me parity is a number as valid as 1.04.”

A 25-basis-point July hike would see the ECB’s Asset Purchase Programme end net acquisitions at the end of June, though in practice some purchases could continue for the first couple of weeks of July, the second official said. This would be in line with ECB guidance for the first rate increase of the cycle to come “some time” after the end of net purchases.

BACK TO NEUTRAL

Hiking rates will start the move back towards neutral, sources said, though not everyone is in agreement as to where that level lies.

“These estimates of the real interest rate of the eurozone are around -1%, since you add two percentage points of inflation, that gives you estimates of the nominal natural interest rate of around 1%. And then we should move towards that point,” said one.

Other were more cautious about the outlook for rates this year.

“I think I could live with a rate hike in July, but I think inflation is mainly driven by energy prices and the war in Ukraine has just prolonged the spike in a way we didn’t anticipate,” one said national central bank official. “It is too early to know if there will be more than one hike this year.”

Claiming certainty that there will be more than one hike in 2022 would be incompatible with the ECB’s commitment to “gradualism”, the source said.

“Our only concern with a hike is that it won’t have a quick impact on cutting inflation because we are seeing a supply shock and not an overheated demand.”

This official was also more relaxed about the exchange rate, which, he noted, was having a positive effect on exports.

An ECB spokesperson declined to comment to MNI on the outlook for rate hikes.