Exclusive: ECB policymakers converging on 25-bps rate hike in May

According to five sources with direct knowledge of the talks, European Central Bank policymakers are converging on a 25 basis point interest rate hike in May, even if other possibilities remain on the table and the debate is not yet concluded.

To combat stubbornly high inflation, the ECB has raised rates by at least 50 basis points at six consecutive meetings, the quickest pace on record. Reuters said that a number of indicators now reinforce the case for increasing caution.

Uncertainty remains high following last month’s financial sector turbulence, and previous rate hikes have still to make their way through the economy, so less is needed because previous moves are still having effect, according to the sources.

They stated that the rate peak is now in sight and that navigating the “last mile” in smaller increments is safer. Another argument for gradualism was that the ECB’s deposit rate, now at 3%, limits growth.

According to the sources, the debate is still ongoing, and the view could alter based on April inflation data and the ECB’s quarterly bank lending survey, both of which are coming just two days before the May 4 meeting.

An ECB spokesman declined to comment.

Some sources said they would like the ECB not to issue any guidance regarding its June move, similar to how it is keeping its options open now, so that policymakers would have a free hand in acting on the new economic projections due then.
According to the sources, some advocate for no change in May – primarily the same Southern European officials who opposed last month’s 50 basis point increase – while others – also a small minority – push for another 50 basis point increase.

So yet, just a few policymakers have openly remarked on the scale of the ECB’s next step.

Klaas Knot of the Netherlands said it was uncertain if 50 basis points would be required or if 25 would suffice. Slovakia’s Peter Kazimir suggested that the ECB moderate the pace of its rises, while Austria’s Robert Holzmann advocated for another 50 basis point increase.

Markets are currently pricing in 25 basis point increases in May and June, with a third such increase completely priced in by September.

According to the sources, rate hikes are necessary because overall inflation remains too high, and core inflation – excluding volatile food and energy costs – could climb for several more months, making any halt the incorrect signal to send.

On Wednesday, French central bank director Francois Villeroy de Galhau stated that a “turnaround in the trajectory of underlying inflation” should be a trigger for the ECB to raise interest rates.

According to the sources, wage growth is still a major concern because labor markets are tight, which may easily feed enormous demands from workers who have lost a significant amount of their actual earnings over the last two years.

The eurozone’s economy continued to perform in accordance with the baseline described in the ECB’s March predictions, which were based on market expectations of additional rate hikes.