Balazs Koranyi

FRANKFURT (Reuters) – The European Central Bank should raise interest rates from record lows in July but could already outline its rate expectations for the coming months at its June 9 meeting, ECB policymaker Madis Müller said.

The eurozone inflation is at a record 7.5%. This represents nearly four-times the ECB target. There’s increasing pressure on the bank for stimulus. Many policymakers push for faster normalisation, including the end to asset purchases and rate increases.

In the first step, bond purchases need to end in early July, as stipulated by the bank’s guidance, but bringing this move forward is also possible, according to Müller, who is Estonia’s central bank governor.

“We could even discuss if we should end purchases a few weeks earlier,” Müller said. “The real issue is interest rate increases and we shouldn’t have much of a delay there either.”

“The recent data confirm that the monetary policy stance is not appropriate given where inflation is and given inflation expectations,” Müller told Reuters in an interview.

Although a June rate increase would violate the bank’s pledge to stop bond purchases first, it could be that the ECB sent a clear signal about June 9 regarding the imminent rate rise. This would be the first rate hike since over a decade.

“I’m not sure we should be deciding on interest rate hikes then (in June),” Müller. We could, however, indicate our expectations regarding interest rates. We could, from my point of view, focus on interest rates at the next meeting which will be held July 21.

Isabel Schnabel (ECB Board member) and Joachim Nagel (Bundesbank Chief), both influential voices on rate-setting Governing Conseil, have both argued in favor of a July rate rise, along with a variety of other policymakers.

HIGH POSITIVE RATES

The first increase should then be followed by several more this year and the deposit rate, now at minus 0.5%, could be back in positive territory by the end of the year, Müller added.

Even if the increments are 25 basis points, it is possible to get to a positive rate before the year ends. At the moment, 25 basis point increments would be a good option.

U.S. Federal Reserve increased rates last week 50 basis points. It is expected that similar moves will be made at the next two meetings. However, the European employment market is less crowded and the impact of the Ukrainian war on the 19-country bloc has been greater than expected. The ECB therefore can be more cautious.

The market currently prices in rate increases for the remainder of the year at 90 basis points or three to four 25-basis point moves.

Müller said he was not worried about the widening spread between the yields of the bloc’s core and periphery since this was a natural, expected response of markets.

However, the bank must contain any unwarranted widenings of spreads. It should also not commit any new tools to combat market volatility.

“When it comes to specifying how such a tool would work, I’m not sure we can do that in advance,” Müller said. It must be tailored to each situation.

For the text of the Q&A with Müller, click on: