ECB governors see growing risk of rates hitting 2% to curb inflation – sources

The southern facade of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, December 30, 2021. REUTERS/Wolfgang Rattay/File Photo

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  • Pricing officials brace for ‘restrictive’ policy
  • Need to move if 2025 inflation is still above 2%
  • Growth forecasts for 2023 deemed too rosy
  • The “reverse tiering” proposal hits the wall

PRAGUE, Sept 10 (Reuters) – European Central Bank policymakers see a growing risk of having to raise their benchmark rate to 2% or more to rein in record eurozone inflation despite a likely recession, sources said. at Reuters.

With inflation hitting 9.1% in August and beating the ECB’s 2% target for the next two years, the central bank raised interest rates at record speed and urged governments to help reduce energy bills that have skyrocketed since Russia invaded Ukraine.

The ECB raised its deposit rate from zero to 0.75% on Thursday and Chair Christine Lagarde guided two or three more hikes, saying rates were still a long way from a level that would bring inflation down to 2%. Read more

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Five sources familiar with the matter said many policymakers see a growing likelihood that they will have to bring the rate into “restrictive territory”, lingo for a rate level that causes the economy to slow down, to 2% or more.

The sources, who spoke on condition of anonymity because policy deliberations are private, said it would most likely happen if the ECB’s first inflation projection for 2025, due to be released in December, were ever higher. at 2%.

An ECB spokesman declined to comment.

The ECB currently forecast inflation of 2.3% in 2024, although a source said an internal forecast presented at Thursday’s meeting put it closer to 2% after taking into account the latest gas prices.

Dutch central bank governor Klaas Knot and Belgium’s Pierre Wunsch were the first to speak openly about entering restrictive territory late last month, at a time when most of their colleagues felt that interest rates just had to return between 1% and 2%. Read more

The sources said policymakers were bracing for a recession this winter and weaker economic growth next year than the ECB’s official projection of 0.9%. But some were reassured by the strength of the labor market, which should cushion the impact of higher rates, they added.

At Thursday’s meeting, policymakers also kicked off a discussion about the tens of billions of euros the ECB is likely to pay out to banks from their excess reserves now that the deposit rate is positive again, officials said. sources.

Policymakers felt that current proposals, including that of an “inverted tier system” that caps compensation on certain reserves, needed more work, the sources said. One of them added that a decision could still come before the next ECB policy meeting on October 27.

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Editing by Andrew Heavens

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