The ECB will continue to raise rates even if the economy suffers
The European Central Bank will continue to raise borrowing costs even if the eurozone economy suffers because letting inflation stay high would be even more painful, two senior ECB policymakers said on Tuesday.
The ECB raised interest rates at a record pace and pointed investors to further hikes to bring eurozone inflation back to double digits to its 2% target.
ECB Vice President Luis de Guindos and Bundesbank President Joachim Nagel said there were costs in terms of economic growth.
“I will do my utmost to ensure that we, the Governing Council of the ECB, do not give up too soon and that we continue to push forward the normalization of monetary policy – even if our measures are holding back economic development,” said Nagel to a German. banking conference, adding steep rate hikes were needed.
“Because in a situation where monetary policy lags the curve, the overall economic costs would be significantly higher,” Nagel said.
De Guindos added that ECB policy “would reduce aggregate demand, both consumption and investment, but that is the only possible way forward because doing nothing would be much worse.”
The eurozone economy is widely expected to contract this winter due to a combination of higher energy costs, weaker global demand and higher borrowing costs.
De Guindos and Nagel both backed the reduction of the ECB’s multi-trillion euro bond holdings, which were accumulated over the past decade when inflation was too low.
De Guindos said this so-called quantitative tightening should be done “with great caution” but could start as the ECB continues to hike rates.
“The characteristics and timing of our QT, which may or may not overlap with the interest rate normalization process, will be discussed in December,” de Guindos said. “I personally don’t see any sort of sequencing here.”
Markets expect the ECB to continue raising rates until the middle of next year, peaking around 3% from 1.5% currently.