ECB likely to raise rates by 0.5% next week, says Central Bank Governor Makhlouf

Reuters

The European Central Bank is likely to raise interest rates by 50 basis points (bps) next week on the way to potentially moving beyond a deposit rate of 3 per cent amid ongoing inflationary concerns, Central Bank Governor Gabriel Makhlouf said on Monday.

The ECB has raised its rate on bank deposits from minus 0.5 per cent to 1.5 per cent in a span of three months, but a slowdown in euro zone inflation has bolstered the case for those advocating a 50-bps hike on December 15th after back-to-back increases of 75 bps.

Makhlouf, who is Ireland's governing council representative at the ECB, said he was not sure the larger-than-expected fall in euro zone inflation in November meant it had peaked yet and that 50 bps "should be the floor" at next week's discussion.

"I would anticipate that 50 basis points is probably where we will end up. But let's see the evidence. Let's have a discussion," Makhlouf said.

Beyond 3%

"I think starting to talk about where we're going to end up is probably premature and I can see scenarios where we go beyond 3 per cent," he said when asked how comfortable he was with market pricing a terminal rate just below 3 per cent.

Makhlouf, Ireland's governing council representative, had earlier stressed in a speech at the Institute of International and European Affairs that the ECB has to be open to policy rates moving into "restrictive territory" for a period next year.

He also said the increasing share of forecasters expecting high rates of inflation over the medium-term could be read as an early sign of inflation expectations moving above the ECB's 2 per cent. He said he did not believe that was happening yet.

He said the likelihood of a technical euro zone recession is "reasonably high", but it will be short and shallow and would not lead to negative economic growth in 2022 and 2023.

Makhlouf said wage growth across the euro zone was not a concern "right now" but victory cannot be declared too soon in preventing a wage-price spiral as there are still wage negotiations going on.

With policymakers also due to discuss next week how to start shrinking the ECB's oversized pile of government debt, Makhlouf said he expected to see changes being implemented towards the end of the first quarter of 2023.

"It (quantitative tightening) needs to be done cautiously and carefully. It's much better to start cautiously and carefully and then accelerate if needed, rather than do anything in a rush and then try and slow down," he said. - Reuters