By Balazs Koranyi
WASHINGTON (Reuters) – The European Central Bank needs to keep raising rates given stubbornly high underlying inflation and its next move could be either a 25 or a 50 basis point increase, Governing Council member Bostjan Vasle said on Thursday.
The ECB has raised rates by a record 350 basis points since July but policymakers say the job is not yet done, even if inflation is now falling quickly, as broader price pressures linger and wage growth is at its fastest in years.
“We have to continue tightening monetary policy,” Vasle, Slovenia’s central bank chief, told Reuters on the sidelines of the IMF’s spring meeting. “It’s too early to decide the pace of our next move but the options I’m considering are a 25 and a 50-basis-point increase.”
The ECB has raised rates by at least 50 basis points at each of six successive meetings but sources close to the discussion say policymakers are now converging on a 25 basis point increase on May 4, even if the debate remains open and other options are still in play.
Vasle said his main concern was underlying price growth, which hit a record high 5.7% last month and could continue to rise.
“Headline inflation is coming down but we are all focused on core inflation, which is still moving in the wrong direction,” Vasle, a career economist, said. “This is, of course, not unexpected given the tightness of the labour market and still not fully materialised pass-through effects.”
Overall economic growth is proving more resilient than many had feared and the bloc has clearly avoided a recession. While this is generally good news, it also means the recent downturn may help the disinflation process less than previously thought.
Another concern for policymakers worried about inflation is the state of the labour market.
Employment in the euro zone is at a record high and unemployment barely ticked up even during the winter months when growth almost ground to a halt.
This is keeping the labour market tight and could further pressure wages, which are growing relatively quickly, even if they are still just catching up after the inflation surge eroded the real value of incomes.
The worry is that nominal wage growth stays high even as overall inflation drops, boosting price growth and creating a hard-to-break link between wages and prices.
“Labour market and wage developments are the most critical factors when assessing inflation and they will have a major impact on our decision,” Vasle said.
However, Vasle acknowledged that uncertainty remained high after last month’s bank sector volatility and said the ECB needed to watch carefully whether rate hikes reveal weaknesses in the economy.
(Editing by Christina Fincher)
