ECB: More and more members of the Board of Directors are in favor of a large increase in interest rates in October

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The ECB raised interest rates by a total of 1.25 percentage points at its last two meetings and has signaled further hikes as inflation creeps towards 10%.

More members of the Governing Council of the European Central Bank (ECB) today favored another big interest rate hike in October as inflation in the Eurozone is expected to reach a new record level.

The ECB has raised interest rates by a total of 125 basis points (1.25 percentage points) at its last two meetings and has signaled further increases as inflation creeps towards 10%.

The case for a further three-quarters of a percentage point (75bps) rate hike in October is bolstered by today’s data in parts of Germany which showed a further rise in inflation, which could reach double digits.

“My preference would be 75 basis points,” Lithuania’s central bank governor Gendiminas Simkus told Bloomberg TV on the sidelines of a conference in Vilnius. “I understand that there should be two options on the table, but a 50 bp increase. it is the minimum,” he added.

The Lithuanian governor said the ECB should also start discussions as soon as possible to reduce its balance sheet, a view echoed by his Estonian counterpart Madis Müller at the same event.

The reduction of the balance sheet could be done by not reinvesting the amounts from the maturities of some bonds that the ECB has in its portfolio, with a value of several trillion euros.

Portugal’s central banker, Mario Centeno, and his Spanish counterpart, Pablo Hernandez de Cos, opposed the idea, fearing it would destabilize the bond market.

“Quantitative tightening could potentially cause market turmoil,” de Kos said in a speech in Bilbao. “This could jeopardize the course of policy normalization at a time when all our efforts should be focused on it.”

De Kos said the models show that the final level of ECB interest rates is lower than what markets now expect. “Based on current information, the median of the final interest rate across all models is at 2 .25%- 2.50%,” he added.

Markets expect interest rates to reach 2% by the end of the year and then rise to around 3% next spring.

De Kos also said that if the ECB starts reducing its balance sheet earlier than markets now expect, that would lead to a lower interest rate.

Talk of a rate hike is intensifying despite growing fears of a recession.

The European Commission’s economic sentiment index released today fell more than expected, fueling expectations that the Eurozone may enter recession in the fourth quarter.

Although the next policy meeting of the euro zone central bank is almost a month away, the members of the Board of Directors of the ECB, the Slovakian Peter Kazimir and the Austrian Robert Holzmann, were in favor of increasing interest rates by 75 bp.

RES-EMP

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