Bundesbank chief Joachim Nagel said yesterday that, “monetary policy must react decisively in order to preserve the credibility of the inflation target. Data from a number of countries shows that frontloading or bringing interest rate increases forward, reduces the risk of a painful economic downturn.”

“In my view, a larger interest rate hike reduces the risk of inflation expectations becoming de-anchored,” Nagel said. “We should not delay further rate hikes for fear of a possible recession. Inflation rates will not return to the central bank’s inflation target on their own.”

However, Governing Council member Yannis Stournaras said yesterday that there is “no need to take very large steps” on rate hike. “Gradual normalization will be appropriate.”

“In my view, this year, we will see the peak of inflation and a steady deceleration thereafter, inflation will gradually decline in 2023 and converge towards the target in 2024,” he added.

ECB Governing Council member Madis Muller said, “I think 75 basis points should be among the options for September given that the inflation outlook has not improved.”

“Still, I’m going into the meeting with an open mind and I want to both see the new projections and hear my colleague’s arguments,” he added.

“We should not be too timid with policy moves as inflation has been too high for too long and we are still far below the neutral rate,” he said.

ECB Governing Council member Klaas Knot said, “a swift normalization of interest rates is an essential first phase, and some front-loading should not be excluded. The broadening and deepening of our inflation problem generates the need to act forcefully.”

Knot saw upside risks to inflation, including from higher food and energy prices, a weaker euro, copious budget spending and rising expectations. He added that even if the slowdown in the economy were to materialize, “this in itself is unlikely to bring inflation back to our objective over the medium term.”

Knot said earlier last week that a rate hike of at least 50bps is needed next week.

ECB Chief Economist Philip Lane said in a speech that the upcoming September monetary policy meeting will be the “start of a new phase” for the central bank. This new phase consists of a ” meeting-by-meeting (MBM) approach” to setting interest rates.

At a basic level, the transition from rate forward guidance to the MBM approach is in line with our monetary policy strategy, which assessed that forward guidance was primarily an appropriate response to the lower bound constraint,” he said. “As policy rates move away from the lower bound, the inherent flexibility of the MBM approach is better suited to calibrating monetary policy in a highly uncertain environment.”

Lane also explained that the MBM approach essentially has “two elements”, the terminal rate, and the speed to close the gap between prevailing interest rate and the assessed terminal rate.

Full speech here.

ECB board member Isabel Schnabel said, “Both the likelihood and the cost of current high inflation becoming entrenched in expectations are uncomfortably high. In this environment, central banks need to act forcefully.”

Governing Council member Martins Kazaks said, “Frontloading rate hikes is a reasonable policy choice. We should be open to discussing both 50 and 75 basis points as possible moves. From the current perspective, it should at least be 50.”

Another Governing Council member Francois Villeroy de Galhau said ECB needs to be at “neutral rate” before the end of the year, “after another significant step in September… Have no doubt that we at the ECB would if needed raise rates further beyond normalization: bringing inflation back to 2% is our responsibility; our will and our capacity to deliver on our mandate are unconditional.”

Governing Council member Olli Rehn said, “The reality is that we have excessively high inflation globally, also in Europe — that’s why it’s action time. The next step will be a significant move in September, depending on the incoming data and the inflation outlook.”