The head of the Central Bank of Latvia and a member of the Board of Governors of the European Central Bank (ECB) Martins Kazaks said that given the record high level of inflation in the eurozone, the ECB should consider raising the rate by more than 0.25% at its July meeting.
The preliminary estimate for the eurozone CPI for June, which will be published on Friday, is likely to show a further acceleration of inflation in the region. This year, price pressure has noticeably increased: inflation in May reached a record 8.1% year-on-year, largely due to rising energy prices. However, broader price pressures have also emerged: the core consumer price index rose 3.8% in May. Given that oil prices are still elevated and the underlying effects are still less than favorable, the consensus forecast is for further acceleration of inflation in June. The overall CPI is expected to have grown by 8.4% year-on-year, while the core CPI increased by 3.9%.
"If the inflation situation continues to worsen and we see negative news from the point of view of inflation expectations, then, in my opinion, a more significant increase in the interest rate would be a reasonable choice"- Kazaks said.
Money markets now expect the ECB to raise rates by a total of 163 basis points this year. Yesterday, it was predicted that rates would increase by 158 basis points.
As for concerns about the recession, Kazaks called the risk of a recession “non-trivial" as soaring prices eat into consumption. Even so, he said he believes rates can be raised "quite quickly."
Kazaks also said that it is extremely important that the ECB's new instrument to eliminate the risk of fragmentation in the eurozone "does not interfere with the normalization of monetary policy." According to him, measures to compensate for the potentially stimulating effect of bond purchases may be part of a new tool.