ECB Director Schnabel: "In this environment, the central banks must act vigorously"

Several monetary authorities at the European Central Bank (ECB) have advocated a major interest rate hike at the upcoming September meeting.

At a monetary policy symposium organized by the US Federal Reserve in Jackson Hole, Wyoming, ECB Director Isabel Schnabel and French and Latvian central bankers Francois Villeroy de Galhau and Martins Kazaks argued in favor of forceful or significant steps.

"We should be open to discussing both 50 and 75 basis points as possible steps," Kazaks noted on the sidelines of the conference.

"From the current perspective, it should be at least 50," he said.

In July, in the fight against skyrocketing inflation, the ECB initiated the turnaround in interest rates and, contrary to what had previously been promised, raised the key rates by a strong 0.50 percentage points.

The key interest rate is currently 0.50 percent.

It was the first increase in eleven years.

The next rate meeting is September 8th.

The capital market recently assumed that the monetary watchdogs would then raise interest rates again by 50 basis points.

But inflation has continued to rise recently.

In addition, the danger increased that inflation expectations could deviate from the central bank target.

"If necessary, we have beyond the normalization on"

"In this environment, the central banks must act vigorously," said central bank director Schnabel.

Speaking for a panel at the conference, she pointed to the danger of people beginning to doubt the long-term stability of their currency.

"The longer inflation remains high, the greater the risk that the public will lose confidence in our determination and ability to maintain purchasing power," she said.

She warned that the cost of doing so would be uncomfortably high if the current high rate of inflation got stuck in people's minds.

Monetary authorities would therefore have to express their “strong determination” to move inflation towards the target quickly.

According to France's central bank governor, the ECB should reach neutral interest rates before the end of the year.

"After another significant step in September," Villeroy said at the conference.

"To do this is to normalize, to take your foot off the gas pedal." Central bankers understand the neutral interest rate level as the interest rate level that neither heats up nor slows down the economy.

For Villeroy, this is between one and two percent in the euro zone.

If necessary, the ECB is also willing to raise rates even higher, he said: "Have no doubt that we at the ECB would raise rates beyond normalization if necessary."

Inflation in the euro area rose to a new record of 8.9 percent in July - in the three Baltic countries it is now even above the 20 percent mark.

Latvia's central bank governor Kazaks now considers it very likely that the euro zone will slip into recession.

"With this high inflation, it will be difficult to avoid a recession," he said.

The risk is significant and a technical recession - a decline in economic output for two consecutive quarters - is very likely.

High inflation and the gas crisis resulting from the Ukraine war are currently slowing down the economy considerably.

In the euro zone, for example, the purchasing managers' index (PMI) for the private sector, which includes the industrial and service sectors, fell to an 18-month low in August.

According to many experts, the decline in this important barometer means that a recession in the winter half-year seems more and more likely.