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ECB must be ready to take the heat and raise rates further

REUTERS/Ralph Orlowski
Schnabel said the ECB will focus on medium-term inflation expectations

The European Central Bank (ECB) must be prepared to take the heat and raise interest rates further, including by more than the market expects, if that is needed to bring down inflation, ECB policymaker Isabel Schnabel said in an interview published on Saturday.

The ECB raised rates for a fourth straight time last week and hinted at further hikes – jolting euro zone bond markets and triggering a backlash from the Italian government.

Investors now expect the rate that the ECB pays on bank deposits, currently at two percent, to rise to 3.4 percent next year, compared to a 2.75 percent peak priced in before last week’s decision.

Schnabel, the leading voice in the ECB’s hawkish camp that has driven the recent string of hikes, opened the door to increasing the deposit rate even further than the market expects if the inflation outlook requires it.

“Whether we will still need to go higher than that will depend on the future inflation outlook,” she told German newspaper Frankfurter Allgemeine Zeitung.

She added that the ECB will focus on medium-term inflation expectations, rather than current readings, and saw little risk of raising borrowing costs too far at present given that real interest rates are still very low.

Three top Italian ministers have criticised the ECB’s latest decision, which caused borrowing costs for debt-laden Italy to soar.

Schnabel said the ECB should weather the pressure.

“We can expect increasing pushback and we need to withstand it,” she said in the interview. “That’s exactly why central banks are independent.”