Eurozone interest rates should also be raised further next year to combat high inflation. That said, Martins Kazaks, the central bank president of Latvia and board member of the European Central Bank, was in Washington on Monday.
Kazaks expects inflation in the euro area to remain high despite a slowdown in economic growth. Many economists expect the eurozone to enter a recession next year.
The ECB board reiterated its support for raising interest rates again by 0.75 percentage points at the forthcoming policy meeting on 27 October. According to the Latvian policymaker, a substantial interest rate hike is necessary because inflation is still far above 2 percent. At the last interest rate meeting of this year, to be held in December, he said interest rates should be raised by another half to three-quarters of a percentage point, depending on the inflation outlook.
“Given the current trend, I see no need to pause,” said Kazaks. However, he believes the pace of interest rate hikes could slow down somewhat next year. Klaas Knot, president of De Nederlandsche Bank and ECB board member, also foresees that the ECB will have to raise interest rates twice to get inflation under control. Pierre Wunsch, governor of the Belgian central bank, also said last week that a new interest rate hike of 0.75 percentage points is not unreasonable, given the continuing rise in consumer prices.
With the International Monetary Fund forecasting a recession in the eurozone in the second half of this year, partly due to the energy crisis, Kazaks also recognizes the danger of an economic downturn in the euro area. Therefore, Kazaks would be “positively surprised” if the new economic forecasts released by the ECB in December “would not include a recession”. The severity and duration of that economic downturn will therefore determine the path for the central bank’s monetary policy in the future, he says.