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ECB has room for 2-3 rate hikes this year

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 Martins Kazaks, ECB policymaker, said that the European Central Bank should increase interest rates quickly and has room to make up to three more increases this year. He is part of a chorus calling for a rapid exit from stimulus.

The ECB has been reducing support at a glacial rate for months, but a rise in inflation to almost four times the ECB’s 2% target intensifies calls for an end to a nearly ten-year-long experiment with ultra-easy monetary policies.

Kazaks, Latvia's central bank governor and chief economist, stated that a rate increase in July was possible and feasible. "Markets price two to three 25-basis point increments by the end of this year. This is a reasonable viewpoint that I don't object to.

He said, "Whether it takes place in July or September isn't significantly different, but I think that July would be the better option."

Kazaks stated that normalization requires the ECB to eventually raise interest rates at the neutral rate. This is the rate at which the central bank is not stimulating nor slowing growth.

Kazaks stated that there are many estimates of this rate ranging from 1% to 1.5%. This is well above the current deposit rate of minus 0.5% and its main refinancing interest rate which is still at zero.

Kazaks said that the ECB initially should raise rates 25 basis points, but that this increase is not set in stone. Kazaks also stated that there is no reason why the central bank should stop when it gets back below zero, even though this psychological threshold may be reached.

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The ECB has not yet guided the markets to a rate increase after its bond buying scheme, also known as quantitative easing, finishes in the third quarter.

This formulation is however too vague. A large portion of the rate-setting Governing council is calling for an end of bond buys at start of third quarter. Rates could rise in July. L8N2WM08Y

Kazaks stated that it was appropriate to end the Asset Purchases Programme early in July. "The APP has served its purpose, so it's no longer necessary."

One reason for the urgency is the fact that inflation expectations are now higher than the ECB target. This indicates that businesses and investors are beginning to doubt the ECB’s ability to meet its targets.

The central bank was cautious because inflation has exceeded its target for almost a decade. Furthermore, excessive price growth is still a relatively recent phenomenon.

"I don’t believe (de-anchoring), has occurred yet, but there are risks. He stated that he believes a rate increase is necessary quickly.

Next meeting of the ECB is scheduled for June 9, where policymakers will set a definitive end date on bond purchases and give clearer guidance on interest rate policies.

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