ECB’s Makhlouf expects 50 bps rate hike in December

(Corrects first paragraph to say rates ‘may have to move into restrictive territory’, not ‘would have to’)

By Padraic Halpin

DUBLIN (Reuters) – The European Central Bank is likely to raise interest rates by 50 basis points (bps) in its December meeting, governing council member Gabriel Makhlouf said, while stressing that the rates may have to move into “restrictive territory” next year.

The ECB has raised rates by a record 200 bps since July, but a slowdown in euro zone inflation and benign signals from the U.S. Federal Reserve have bolstered the case for those advocating a 50-bps hike after back-to-back increases of 75 bps.

“To continue on our path to bring inflation back to our 2% target, I see a 50 bps increase in interest rates as the minimum needed at our December meeting,” Makhlouf said on Monday in a speech at the Institute of International and European Affairs think tank.

Makhlouf told journalists after the speech that the governing council was likely to settle on a 50 bps increase.

French central bank chief Francois Villeroy de Galhau said on Sunday he favoured a 50 bps increase.

“How much further do we need to go in terms of interest rate increases in 2023? We have to be open to policy rates moving into restrictive territory for a period,” said Makhlouf, Governor of the Central Bank of Ireland.

“It is premature to be talking about the end-point for policy rates amid the prevailing levels of uncertainty.”

Makhlouf said it would be wrong to ascribe the euro zone’s current inflation problem solely to supply shocks and that the increasing share of forecasters expecting high rates of inflation over the medium-term needs closely monitoring.

“It could be an early warning sign of inflation expectations moving away from our 2% target. Were expectations to become ‘dis-anchored’ in this way, it would make the task of sustainably returning inflation to our 2% target far more difficult,” Makhlouf said.

He said as price pressures broaden across the spending basket, the risks of high inflation becoming embedded rises, and the case for tighter monetary policy becomes stronger.

Generous household supports by some euro zone governments could add to inflationary pressure, he said.

“Broad-based measures to support all households will serve to boost demand at a time when restraint is needed,” he said. “This may necessitate a stronger response from monetary policy makers than would otherwise be the case.”

Makhlouf said there are complex issues involved in quantitative tightening, ahead of a discussion by policymakers next week on shrinking its oversized pile of government debt.

(This story has been corrected to say rates ‘may have to move into restrictive territory’, not ‘would have to’, in the first paragraph)

(Reporting by Padraic Halpin; Writing by Conor Humphries; Editing by Gareth Jones and Arun Koyyur)