The head of the ECB, Šimkus, says that the December interest rate increase by half a point is minimal

(Bloomberg) — The European Central Bank needs to raise interest rates by at least half a point in December to stem record inflation, according to Governing Council member Gediminas Šimkos, who may still accept a bigger move.

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Although it is clear that price growth is still very fast in 2023. borrowing costs are expected to rise further, it is too early to tell what the next step will be as officials will not receive new economic forecasts until December 14-15. at the meeting. “, said Šimkus. he said in an interview. According to him, this will be influenced by the decision to reduce the European Central Bank’s bond portfolio.

“It is clear that 50 basis points is necessary,” said the head of the Central Bank of Lithuania in Vienna. “Because we continue to see very strong inflationary pressures and we need to ease them as quickly as possible to avoid a downward spiral in inflation expectations.” 75 is also possible.”

Without seeing updated inflation and economic growth forecasts, which will provide a first look at 2025, “it is too early to judge.”

After raising 200 basis points since July, the biggest monetary tightening in the ECB’s history, interest rates are on pace to reach levels that are seen as neither stimulating nor constraining the economy. This coincides with market hopes that the Federal Reserve may slow the rise in borrowing costs after weak inflation.

At the same time, the economies of the 19 eurozone countries are preparing for an economic recession, which will be caused by the rise in energy prices after the Russian invasion of Ukraine.

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Bundesbank President Joachim Nagel warned this week that it was too early to say the size of the next interest rate move, although he said it would be “strong”. On the other hand, Portugal’s Mario Centeno said on Monday that he sees the right conditions to slow down the pace of hikes.

Like many of his colleagues on the board, Simkus indicated that the economic downturn would not significantly change the ECB’s course, saying: “I don’t think it will be deep and I am sure that the recession will not resolve itself. inflation problem’.

Officials meeting next month must also agree on key parameters for reducing the bond pile from previous stimulus programs, a process known as quantitative easing. According to Šimkus, this may affect the discussion about borrowing costs.

“You need a holistic approach,” he said, “not to make a decision about one instrument without thinking about what you’re going to do with the other.” “I don’t see them as alternatives, but of course they have a certain countervailing effect, that is synergy.” If one works better for you, you can do stronger moves with the other.”

Šimkus called for a careful, albeit rather early, reduction in the ECB’s bond reserves.

“The sooner we start quantitative easing, the better,” he said. “But in smaller increments so it can run somewhere in the background.”

It also cast doubt on expectations among economists polled by Bloomberg this month that the European Central Bank would stop raising interest rates in March. According to Šimkaus, next year they will continue to multiply, moving to a limited area.

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“We are not motivated by the number of meetings it takes to set a final rate,” he said. We need a result of 2% inflation in the medium term. And if necessary, we will go beyond March. It is absolutely clear to me.”

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