By Balazs Koranyi
SINTRA, Portugal (Reuters) – Euro zone inflation is so persistent that interest rate hikes beyond July may still be needed, Slovenian policymaker Bostjan Vasle said, joining a growing camp of policymakers making the case for even tighter policy.
The ECB has raised rates by 4 percentage points in the past year, the quickest pace of hikes on record, and promised another increase in July, even if it is keeping its options open for subsequent decisions.
Vasle said he was biased towards further tightening and incoming data would have to convince him that a September increase is not needed, rather than the other way around.
“Given the persistence of inflation, we need to keep tightening monetary policy at our next meeting,” Vasle told Reuters on the sidelines of the ECB’s Forum on Central Banking.
“Beyond that we will remain data dependent,” he said. “But the burden of proof will be that they indicate that further rate hike is not needed instead that it is needed.”
ECB President Christine Lagarde warned on Tuesday that inflation could be more persistent than feared, an argument understood by ECB watchers as a signal that more rate increases. May be needed.
Vasle dismissed arguments that weak growth readings ease the ECB’s job and do some of its work, since recessionary environments tend to be naturally deflationary.
While manufacturing has indeed been in recession, economies on the bloc’s periphery are performing well and services are booming even before what is set to be a blockbuster tourism season.
“All these suggest that growth developments are not significantly different than our most recent projections,” Vasle said.
Meanwhile labour markets are hot, a shortage of workers is becoming more evident and consumption is resilient, all adding to price pressures.
This also casts doubt on the argument by some ECB policymakers that corporate profit margins will come down this year, absorbing some of the wage increases and relieving pressure on prices.
“The expectations that corporate profit margins will decline and absorb some of the impact of wage hikes bears significant risks,” Vasle said.
“The labour market is strong and consumption is resilient. So firms might continue to enjoy pricing power, especially because demand is too strong to push down margins.”
(Reporting by Balazs Koranyi, Editing by William Maclean)
