Fiscal Expansion Risks Forcing ECB Into More Rate Hikes, Kazaks Says

https://money.usnews.com/investing/news/articles/2022-10-13/fiscal-expansion-risks-forcing-ecb-into-more-rate-hikes-kazaks-says

WASHINGTON (Reuters) - The European Central Bank should keep raising interest rates quickly, and expansive fiscal policy around the 19-country euro zone is raising the risk the bank will have to tighten more, Latvian central bank chief Martins Kazaks said on Thursday.

The ECB should lift its 0.75% deposit rate by 75 basis points on Oct. 27 and should go for another large hike in December, Kazaks told Reuters, joining a growing camp of policymakers advocating an oversized move this month.

But the steps could become smaller thereafter while being complemented by other moves, such as shrinking the ECB's oversized portfolio of private and public bonds, he added.

"A large step at the next meeting is warranted and I think 75 basis points is appropriate," Kazaks, who sits on the ECB's rate-setting Governing Council, told Reuters on the sidelines of IMF meetings in Washington.

"In December, we can also have a significantly large step but whether it will it be 50, 75 or something else, that is up for discussion," he said.

The ECB increased rates by a combined 125 basis points since July, the fastest pace of policy tightening on record, and markets see the deposit rate rising to around 2% by the end of the year and around 3% sometime next spring.

Kazaks argued that governments needed to help society's most vulnerable with targeted budget support but there was a risk now that monetary and fiscal policy could counter each other.

Too much fiscal spending naturally runs up inflation and Kazaks said there's now a risk that fiscal and monetary policies run counter to each other.

"Fiscal policy must not add to inflationary pressures and that's a fine line to walk," Kazaks said. "Fiscal policy has to be aware of its impact."

"Governments must help the less well off part of society but must not overdo it because then we will need to raise rates further, which exaggerates the risks, for instance in financial stability."