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The accounts of the European Central Bank show inflation fears that justify more rate hikes

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On July 21, flags fly in front of the European Central Bank building in Frankfurt, Germany. Wolfgang Ratte/Reuters

European Central Bank policymakers fear inflation could take a hit at their latest policy meeting, so they will have to raise rates further, reports from the Oct. 26-27 meeting showed on Thursday.

The ECB raised interest rates by 75 basis points to 1.5 percent during the meeting to combat high inflation, bringing the total to 200 basis points for the sharpest policy hike since July.

Policymakers have also put the bank’s balance sheet deficit of €9 trillion on the agenda – nearly a decade’s reduction in government debt purchases, designed to reignite inflation that undermines the ECB’s objectives. Has been.

“It was also clear that rates needed to be raised further to reach levels that meet the ECB’s medium-term target of 2 percent,” the meeting’s reports showed.

The ECB said some policymakers also expressed the view that “monetary tightening will have to continue once the monetary policy stance has normalized and moved into the broadly neutral zone”.

The 75 basis point rate hike was supported by a large majority, although “some” policymakers wanted a smaller step of 50 basis points.

While the ECB remains committed to a further rate hike, markets are now expecting a more modest 50 basis point move on Dec. 15, as a range of policymakers have suggested back-to-back 75 basis point delays were warranted following the increase in basis points.

A possible compromise could be that a small rate hike at the start of a reduction in the portfolio of bonds purchased under the ECB’s €3.3 trillion purchase program, known as quantitative tightening.

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Even if the ECB slows down, the market deposit rate will double to 3 percent next year as inflation, now at 10.6 percent, will take several years to return to the ECB target of 2 percent, possibly until 2025. It will take years.

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