Prague, Sept. 11 (BNA): European Central Bank policy makers see increased risks that they will have to raise the key interest rate to 2% or more to curb record high inflation in the euro zone despite a possible recession, sources told Reuters. .
With inflation hitting 9.1% in August and exceeding the European Central Bank’s 2% target for the next two years, the central bank raised interest rates at record speed and urged governments to help lower energy bills that have ballooned since the Russia and Ukraine war.
The European Central Bank raised its deposit rate from zero to 0.75% on Thursday and President Christine Lagarde directed two or three more increases, saying interest rates were still far from the level that would bring inflation back to 2%.
Five sources close to the matter said many policymakers see an increased probability that they will need to move the rate into “restricted territory,” the terms for the price level causing the economy to slow, at 2% or higher, Reuters reports.
This will likely happen if the ECB’s first inflation forecast for 2025, due to be published in December, remains above 2%, said the sources, who spoke on condition of anonymity because the political deliberations are private.
A spokesman for the European Central Bank declined to comment.
The European Central Bank currently expects inflation to be 2.3% in 2024, although one source said an internal forecast made at Thursday’s meeting brought it closer to 2% after taking into account recent gas prices.
Dutch central bank governor Klaas Knott and Belgium’s Pierre Wönch were the first to speak publicly about entering a restricted area late last month, at a time when most of their colleagues felt interest rates only needed to return to between 1% and 2%.
The sources said policy makers are bracing for a recession this winter and economic growth next year that is weaker than the European Central Bank’s official forecast of 0.9%. But, they added, some felt relief from a strong job market, which should mitigate the impact of higher rates.
At Thursday’s meeting, policy makers also began a discussion about the tens of billions of euros the European Central Bank might pay banks on their excess reserves now that the deposit rate is positive again, sources said.
The sources said that policy makers considered the current proposals, including the proposal for a “reverse gradient system” that sets bonuses for certain reserves, as needing more work. One added that the decision could come before the next ECB policy meeting on October 27.