The European Central Bank needs to raise interest rates into positive territory when taking into account inflation, despite recession risks, Belgium’s central bank chief told CNBC.
September’s hike in the ECB’s benchmark deposit rate to 0.75% meant rates were still negative in real terms, said Pierre Wunsch, governor of the National Bank of Belgium. “Real” interest rates are adjusted for inflation, which hit a record 10% in the euro zone in September and is forecast to be an average 8.1% for the year.
“Frankly on the basis of our base case, which is now more or less a technical recession in Europe, I think we are going to have to go real positive somewhere,” Wunsch told CNBC’s Geoff Cutmore.
Exactly when this should happen or what the rate will be is not clear, since it will depend on the impact of the economic slowdown on inflation and how the real rate is calculated, he said. However, he added that the key rate will “most probably” need to be above 2% by the end of the year.
“We’ve been claiming that what happens in Europe is different from the U.K., from the U.S. But over the last six months basically the direction we’ve been taking was not that different. So my bet would be it’s going to be over 2%, and I would not be surprised if we have to go to above 3% at some point,” Wunsch said at the 2022 Annual Meetings of the International Monetary Fund and the World Bank Group in Washington, D.C.
The ECB raised rates from -0.5% to zero at its July meeting, its first hike in 11 years, after keeping rates in negative territory since 2014.
The eurozone economy grew in the second quarter and unemployment is at a record low, but many analysts expect a recession, given energy supply constraints, rising rates and high inflation.
The U.S. Federal Reserve, facing its own balancing act between hot inflation — with the latest figures out Thursday — and a potential recession, has taken its federal funds rate up to a range of 3%-3.25%, the highest it has been since early 2008. Officials have repeatedly indicated it will go higher.
The Bank of England has also carried out a series of rate rises, and its chief economist said Wednesday a “significant” further rise was needed at its Nov. 3 meeting. It is currently attempting to tackle massive volatility in U.K. markets through an emergency bond-buying program, following a controversial government budget.
Another 75 basis points?
Also speaking to CNBC’s Geoff Cutmore in Washington, Austrian central bank Governor Robert Holzmann said ECB policymakers had made a conscious decision to try to “work with the market, to express our views and to be more readable.”
He flagged that the ECB’s 75 basis point hike had been expected by markets, and expectations were currently that its next policy move, due Oct. 27, would be similar.
“My impression and my knowledge is that the markets are spot on,” he said. “Talking to the market, hearing from the market also what they expect for the next meeting, I think it will be at a similar level.”
