FRANKFURT – Martins Kazaks from the European Central Bank said that there should be a rapid increase in interest rates and room to make three additional increases this year.

While the ECB has been easing support back at a glacial rate for several months, a spike in inflation that is nearly four-times the ECB’s 2% target makes it more urgent to end a near decade-long attempt to implement ultra-easy monetary strategy.

Kazaks is Latvia’s central banking governor. He said that it was feasible and possible for the rate to rise in July. Markets have priced two to three 25-basis point increments by the close of the year. This is a sensible view that I don’t have any objection to.

He said, “Whether it takes place in July or September does not make a difference. But I believe July would be better.”

Kazaks stated that normalization requires the ECB to eventually increase interest rates at the neutral rate. This is the rate where the central bank does not stimulate nor slow down growth.

Kazaks indicated that the rate was ranging from 1% up to 1.5%. That’s well higher than its current 0.5% deposit rate. Its main refinance rate is still at zero.

Kazaks stated that while initially, the ECB ought to raise rates by 25 basis point but this increase is not set in stone. Kazaks also stated that there is no reason why the central bank should cease raising rates once they get back to zero.

The ECB so far has not guided the markets to a rate increase after its bond buying scheme (commonly known as quantitative easing) ends in quarter 3.

However, this formula is too vague. The rate-setting Governing Board is pushing to end bond purchases at the beginning of the third trimester. Therefore rates may rise in July. [L8N2WM08Y]

Kazaks stated that it was appropriate to end the Asset Purchases Programme early in July. “The APP has fulfilled its purpose so it’s not necessary anymore.”

The urgency stems from the fact that inflation expectations have started moving above the ECB’s target. It is a sign that both investors and business are beginning to doubt the ECB’s resolve and ability further out to achieve its goal.

However, the central bank is cautious since inflation exceeded its target almost a decade ago and excessive price rises are a fairly new phenomenon.

Although I don’t believe that (de-anchoring has occurred yet), the risk is there. “That’s why I believe a rate rise relatively quickly is required,” he stated.

On June 9, the ECB’s next meeting will be held. Policymakers will likely set a date for bond purchases to end and offer clearer guidance regarding interest rates.

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