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ECB’s Kazaks rejects rate cut bets as core prices rise

FILE PHOTO: Latvia's central bank Governor Martins Kazaks speaks at an economic conference in Riga, Latvia November 3, 2022. REUTERS/Ints Kalnins
FILE PHOTO: Latvia’s central bank Governor Martins Kazaks speaks at an economic conference in Riga, Latvia November 3, 2022. REUTERS/Ints Kalnins

By Francesco Canepa

FRANKFURT, Jan 13 (Reuters) – Martins Kazaks, a member of the European Central Bank’s Governing Council, rejects investor bets that the ECB will cut interest rates later this year, saying a deep recession would be necessary. to reduce borrowing costs.

Money markets expect the ECB to raise the rate it pays on bank deposits by almost 150 basis points between now and summer, before reversing at the end of 2023 and next year, which would likely imply a slowdown in growth and inflation.

However, Kazaks told Reuters he saw no “raison d’être” for it and that rates should continue to rise to curb inflation, which in the euro zone is almost five times above the ECB’s 2% target.

“It would take a deep recession with a significant increase in unemployment for inflation to collapse and thus put downward pressure on rates,” the governor of the Latvian central bank said in an interview. “But that’s not likely, given the current macroeconomic outlook.”

Kazaks, widely seen as a supporter of aggressive monetary policy, added that rates should be raised “into restrictive territory”, an ill-defined level that slows economic growth and is considered by most economists to be above the current rate of 2%. .

Eurozone inflation fell to 9.2% last month, largely thanks to lower energy prices and a one-off subsidy in Germany, but underlying price pressures continued to mount.

Kazaks said core inflation, which excludes food and energy, is the measure to watch.

“Core inflation may continue to rise even though headline inflation is falling, for example due to swings in energy prices,” he said. “In my opinion, core inflation is currently a key indicator of inflation persistence and policy decisions.”

He declined to comment on the level at which rates should top out.

“The uncertainty is too high, and we will find it step by step,” he said.

The head of the Finnish central bank, Olli Rehn, as well as the head of the Spanish central bank, Pablo Hernández de Dos, have also called on the ECB to raise rates “significantly” at their next meetings.

However, his Portuguese counterpart, Mario Centeno, has said that the rises are nearing an end.

Last month, the ECB slowed its rate hikes from 75 to 50 basis points, but announced more hikes of the same size.

Since that meeting, speculation has grown about a slowdown in the pace of tightening, as inflation in the euro zone and the United States slows.

(Reporting by Francesco Canepa; editing in Spanish by Flora Gómez)

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