ECB will have to raise rates again, extent uncertain, Kazimir says

ECB Must Consider Further Rate Hikes to Tackle Persistent Inflation

ECB Policymakers Warn of Persistent Inflation and Need for Further Action

FRANKFURT, Nov 2 (Reuters) - The European Central Bank will have to raise interest rates again to prevent high inflation from getting entrenched and markets may be underestimating what is needed to quell price pressures, Slovak central bank chief Peter Kazimir said.

The ECB kept rates unchanged last week but a number of policymakers since then have made the case for adding to the ECB's two rate hikes sooner rather than later, given sky-high energy costs that they argue will eventually set off second-round effects.

Market Expectations and the ECB's Approach

"For me, the question is increasingly not whether further action will be needed but how much more will be required," Kazimir, a hawkish voice on the 27-member Governing Council, said on Monday.

"Markets may still underestimate what is required. The issue is not one meeting or one move. It is the path needed to bring inflation back to target and keep it there," he added.

Financial Market Projections

Financial markets now see between two and three rate hikes from the ECB over the next year before a slow retreat, as market-based inflation indicators suggest that price growth will be well above the ECB's 2% target for years to come.

ECB's Recent Decision and Rationale

The ECB held rates unchanged last Thursday on the premise that second-round inflation effects have yet to take hold, wage growth is muted and economic growth is likely to take a hit from surging longer-term borrowing costs.

Risks of Delayed Action

But Kazimir said these were not necessarily as reassuring as some think. 

Potential for Cost Pressures to Build

He said cost pressures could build before businesses pass them on and that expectations could shift before wider price pressures appeared in the data. 

The Dangers of Waiting for Certainty

"Waiting for certainty does not necessarily make for good policy," he said.

Growth Slowdown and Inflation

This also means that the slowdown in growth does not necessarily weaken inflation since cost pressures have already been building for months, Kazimir said.

Role of Government Budgets and Fiscal Prudence

Moreover, growth is relatively solid because government budgets are buffering the economy and a lack of fiscal prudence can also keep price pressures up, he added. 

Call to Action

"Last week's pause was not a finish line," Kazimir said. "We should act before high inflation starts to feel normal."

Reporting Credits

(Reporting by Balazs KoranyiEditing by Gareth Jones)