Balazs Coranyi

WASHINGTON, (Reuters) – European Central Bank policymakers want to stop their bond buying scheme as quickly as possible and increase interest rates as soon July as possible but not later than September. This was according to nine people familiar with ECB thoughts.

ECB removed stimulus this year at the slowest pace, but inflation continues to rise and is threatening policymakers’ ability to continue their decade-old experiment in unconventional support.

The main problem so far is that while longer-term projections showed that inflation would fall below the ECB’s 2% target, new estimates were shared with policymakers on April 14, which showed an inflation rate of even 20% above target.

One source, who requested anonymity, said: “It was barely over 2%. So in my understanding all the criteria to increase interest rates have now been fulfilled.”

Members of the Governing Council have been critical of the ECB’s underestimating inflation. It hit 7.5% in October last year. They view the latest projection as a way to acknowledge the truth.

According to another source, “People actually cheered when Philip (chief economist),” said one other.

A spokesperson for the ECB declined to comment.

There are no policy proposals yet, and the ECB’s next meeting will be held on June 9, which is over a month from now.

Christine Lagarde (ECB President) stated Friday that the end of bond buying should occur in the first quarter, and that a rate hike this year would be likely.

THREE MOVES

Nearly everyone said they expect at least two rate increases this year. However, some sources suggested that it could be a third, though that would depend on the market’s reaction to its movements.

Markets are pricing in approximately 85 basis points of increases for this year. So more than three 25 base point moves would push the minus 0.5% rate into positive territory, for the first-time since 2014.

The ECB’s long-held argument that unwinding stimulus is merely normalizing policies, has been contested by the ECB for many years. This concept, which is not defined and does not have any set parameters, is called “Unwinding Stimulus”.

Reuters spoke with policymakers, who said normalisation would mean the return to the neutral interest rate, which does not stimulate nor hinder growth.

These figures are approximately between 1% and 1.25%. This is 150 to 175 basis point above the current rate.

A fifth source stated that “Getting up to this level by 2023 would be possible.”

However, interest rates will only increase once bonds purchases are completed. All 9 policymakers spoke under anonymity and said that this should occur on either June 30th or July 1st.

The ECB could then raise rates at its July 21 meeting.

A third source stated that unless the outlook is drastically changed, he would recommend July.

Sources indicated that some would prefer to wait to September. This is partly due to the availability of new forecasts by then, and partly to avoid major policy changes during the summer months when liquidity can be lower.

In 2011, the ECB was on the brink of a debt crisis and raised interest rates for the first time. It is widely believed that this move was its most serious policy mistake.

According to a fourth source, “Memory about that mistake still haunts us.” “Some people fear making a similar error.”

It is likely that the U.S. Federal Reserve will tighten faster. The market expects to see tightening of approximately 250 basis points this year, with some 50-basis point increases.

However, the ECB’s policymakers all stressed that things could turn radially up until then, as Russia’s invasion of Ukraine continues to be a menace to trust and the COVID-19 pandemic remains.

A few policy makers suggested that technical recessions, which are two consecutive quarters with negative growth, could be possible, but overall the figure for this year will still be positive.