Two additional European Central Bank policy-makers support more interest rate hikes

European Central Bank policy-makers Luis de Guindos and Yannis Stournaras on Thursday joined a chorus of euro zone central bankers supporting more euro zone interest rates increases at the pace of last week’s hike to tame inflation.

The ECB raised its key interest rates by 50 basis points seven days ago and President Christine Lagarde signalled as many as two more hikes of the same magnitude after acknowledging that inflation would not to fall to the ECB’s 2 per cent target until the end of 2025.

De Guindos, the ECB’s vice-president, said “increases of 50 basis points may become the new norm in the near term” and last for a “period of time” despite a shrinking economy.

“If we do nothing, the situation would be worse because inflation is one of the factors behind the current recession,” he told French newspaper Le Monde.

De Guindos also said he was concerned that markets could underestimate the persistence of inflation and that they might consider current easy fiscal policy to be incompatible with monetary policy.

Greek governor Yannis Stournaras, a policy dove who tends to back a more cautious approach to rate hikes, meanwhile told Skai Radio that the ECB’s deposit rate “could rise towards 3 per cent by March”.

That implies a 100 basis-point increase over the next two meetings from the current 2 per cent rate.

They joined colleagues from across the bloc in backing further rate increases.

The ECB last week also laid out plans to drain cash from the financial system by not reinvesting proceeds from some maturing bonds bought over the past decade, when inflation was too low and the central bank was trying to boost it.

De Guindos said banks had a solid capital position and could withstand a shock from higher market interest rates but he had “a lot more doubts” about hedge funds, which have highly illiquid and risky assets.

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