ECB might need to keep raising interest rates for longer than initially anticipated, according to Governing Council member Peter Kazimir. His comments indicate an evolving stance within ECB as it grapples with stubbornly high inflation in the Eurozone.

“Based on today’s data, we will have to keep raising interest rates for longer than anticipated,” Kazimir stated. He suggested a slower pace of rate hikes, at 25 basis points increments, as a measured approach that allows for longer-term adjustments, should incoming data warrant it. “So, slowing down the pace to 25 bps is a step that will allow us to go gradually higher for longer, should that be necessary and warranted by incoming data,” he explained.

Kazimir pointed to core inflation trends, rising wage pressures, and high-profit margins as factors necessitating vigilance and the continued pursuit of the ECB’s current monetary policy trajectory. “The development of core inflation, the continued buildup of wage pressures, and high-profit margins call for vigilance and reconfirm the need to continue on our path,” he said.

However, the true effectiveness of the ECB’s measures and the trajectory of inflation towards the target will not be fully assessed until the September forecast. “Our September forecast will be the earliest date to answer how effective our measures are and whether inflation is moving towards the target,” Kazimir added.

In face of high inflation, ECB Governing Council member Martins Kazaks has voiced his belief that further interest rate hikes will be necessary to contain it. His remarks counter market expectations for borrowing costs to be cut as early as next spring, a notion Kazaks has described as “significantly premature.”

He outlined a dual strategy to bring the current inflation rate of 7% back to ECB’s target of 2%. “The first is raising the rates and of course we don’t know where the terminal rate is,” he commented. “Another thing is keeping those rates at elevated and sufficiently restrictive levels.”

Despite concerns about potential economic risks from higher interest rates, Kazaks emphasized that the risk of doing too little to counter inflation was far greater than the risk of over-tightening. “Persistently high inflation is a bigger problem for society than a relatively short and shallow recession,” he warned.

Underlining the importance of effective policy response, Kazaks cautioned, “Failing to contain inflation would be a failure because then the policy response in the second go would then need to be much tighter.”

ECB Chief Economist Philip Lane acknowledged the ongoing momentum in inflation but predicted a shift toward disinflation later this year.

Speaking at a panel in Berlin, Lane said, “There’s still a lot of momentum in inflation, but later this year and ongoing a lot of this inflation is supposed to reverse, partly because of the reversal of the underlying shocks, partly because of monetary policy.”

Despite this outlook, Lane noted that there is still momentum in food and core inflation, which runs counter to the decline in energy inflation.

Discussing businesses’ expectations, Lane mentioned, “This year (businesses) expect margins to fall quite a bit, because they may face cost increases, including labour costs increases, but they won’t be able to increase prices by so much because demand is normalising.”

He also emphasized the importance of rebuilding real wages in the labor market, stating, “There’s a very basic imperative for the labour market to rebuild real wages.” Lane explained that this transition phase, which will last several years, helps clarify why inflation is not immediately dropping back to 2%.

In ECB Survey of Professional Forecasters for Q2 2023, respondents downgraded their expectations for headline HICP inflation in 2023 downward. The lower headline inflation expectations are primarily attributed to expectations of reduced energy price inflation, particularly for natural gas. Headline inflation expectations for 2023, 2024, and 2025 are now at 5.6%, 2.6%, and 2.2%, respectively, compared to Q1 forecasts of 5.9%, 2.7%, and 2.1%.

On the other hand, expectations for HICP inflation excluding food and energy in 2023 were revised upward, primarily results from recent data outturns and higher wage growth forecasts. Core inflation projections are at 4.9% in 2023, 2.8% in 2024, and 2.3% in 2025, comparing to prior forecasts of 4.4%, 2.8% and 2.3% respectively.

Real GDP growth is now projected at 1.2% in 2023, 1.6% in 2024, and 1.4% in 2025, compared to prior forecasts of 1.4%, 1.7%, and 1.4%.

Full release here of ECB SPF here.