Three weeks ago, policy makers had only just started to coalesce around a first move in July. Now they are openly discussing a half-point increase, whether to end sub-zero borrowing costs as soon as this year and then where to go next.
That discussion reflects heightened alarm at rapid inflation, it also shows how the changing policy cycle has energized ECB officials whose stance for much of the past decade has featured repeated salvos of stimulus.
The momentum with which the discussion has shifted raises the prospect of more heated dialog before a pivotal meeting on June 9 that should seal the end of ECB bond buying and formally prime investors for a July rate move.
ECB President Christine Lagarde’s blog post on Monday signaled a timetable of two quarter-point increases in July and September irking more hawkish officials who craved at least the option for a bigger hike, according to people familiar with the matter.
Lagarde herself said during an interview with Bloomberg TV that the inflation shock hitting the euro region isn’t demand-driven, giving the ECB some breathing room.
“It’s definitely an inflation that is fueled by the supply side of the economy,” she said from the World Economic Forum in Davos. “In that situation, we have to move in the right direction, obviously, but we don’t have to rush and we don’t have to panic.”
Yet the momentum of the argument briefly appeared even to have swayed Lagarde. She also said “positive territory” by the end of the third quarter was an option a prospect that, on the face of it, suggests more than 50 basis points of tightening by September.
“This is something we will determine on the basis of our projections, on the basis of our forward guidance,” Lagarde said.
With that comes the possibility that more policy makers might publicly call for open aggression on inflation at a time when most global counterparts have long taken action.
Three policy makers have now publicly aired a half-point move. Dutch central bank governor Klaas Knot set the ball rolling on May 17, favoring a quarter-point hike unless the inflation outlook worsens.
Latvia’s Martins Kazaks said this week that half-point increases could be discussed, while Austria’s Robert Holzmann insisted in another interview that such a move is already “appropriate.”
Tensions among ECB officials may be already materializing, with pressuring scenarios that include the US Federal Reserve, which delivered a half-point increase earlier this month, and Sweden’s Riksbank, which abruptly changed course to hike in April.
