European Central Bank interest rates will likely have to rise further to contain inflation, policymakers said on Wednesday, but at least one outspoken conservative floated the idea of a slowdown in the pace of increases.
The ECB has raised rates by a combined 350 basis points since July but offered no guidance for its next meeting on May 4, arguing that recent financial market tension could upend any plan.
ECB chief economist Philip Lane, who makes the formal policy proposals to his 25 colleagues, said that his baseline is for the turmoil to dissipate and then rates would need to rise several times.
"Under our baseline scenario, in order to make sure inflation comes down to 2%, more hikes will be needed," German newspaper Die Zeit quoted Lane as saying. "If the financial stress we see is non-zero, but turns out to be still fairly limited, interest rates will still need to go up."
Slovak central bank chief Peter Kazimir, a proponent of rapid rate increases, meanwhile made the case for slower rises following three straight 50-basis point hikes.
"I personally think that if we do not significantly veer from the baseline scenario, we should not let up, that means we should continue raising interest rates, maybe at a slower pace, but we should continue," Kazimir told a news conference.
Kazimir said he was seeing a drop in investors' appetite for providing capital to banks, which could then curtail lending and hamper growth.
Bank shares tumbled this month after the collapse of Silicon Valley Bank in the United States and on the sale of Credit Suisse, but markets have been calm this week with shares recovering much of their losses.
Lane argued that euro zone banks were well capitalised so there is no direct read-across from U.S. and Swiss banking tensions to the 20 nation currency bloc but the ECB was ready in any case to provide liquidity.
Lane also said that even if inflation is still high, earlier stages of production show moderating price pressures and these will eventually feed through to consumer prices.
"If you look at the earlier stages of production, at the farm gate prices, at the prices of the food ingredients, you will recognise: all of these have turned around," Lane said.
Economists do not expect this to come through in data this week. Inflation figures, to be published on Friday, are expected to show a drop in headline numbers but underlying price growth could accelerate further.
Lane added that a recession is not necessary to bring inflation down and a soft landing of the economy was possible.
"We’ve lost so much growth momentum in the pandemic that it’s possible for the pandemic recovery to continue and for inflation to come down simultaneously," Lane said. (Reporting by Balazs Koranyi, Jan Lopatka, Jason Hovet and Robert Muller; Editing by Toby Chopra)