The market may still underestimate how high ECB interest rates have to rise – Rehn
HELSINKI (Reuters) – The European Central Bank needs big rate hikes at least in its next two meetings and markets may still underestimate how high interest rates will have to rise, Bank of Finland Governor Olli Rehn said on Friday.
The ECB raised the key interest rate by half a percentage point to 2 percent on Thursday and promised to raise it at a “steady pace” going forward. This was a compromise decision after a large number of conservative policymakers called for a larger increase.
Rehn said unusually high inflation could mean a rate hike of half a percentage point is needed at each of the ECB’s next two meetings, an unusually broad comment for a bank that has recently shied away from interest rate guidance.
“We are staying the same course as President (Christine) Lagarde announced yesterday, and that probably means a 50 basis point rate hike in the coming meetings, at least as far as I can see in February and March,” Rehn told a news conference.
“We will stay the course and do everything we can to contain inflation and stabilize it at the target,” he said. “There’s still a long way to go.”
Lagarde warned on Thursday that the market pricing in the expected peak of the interest rate cycle, known as the terminal rate, may be too low because those rates are at odds with inflation slowing back to 2 percent in time.
Investors reacted quickly and the pricing of the terminal interest rate rose from around 2.9 percent to around 3.1-3.2 percent. However, Rehn said this may still not be enough.
“Whether the market’s expectation of the terminal price is sufficient remains to be seen. I am not completely convinced of that at the moment,” Rehn said.
(Reporting by Essi Lehto, writing by Balazs Koranyi; editing by Hugh Lawson)