ECB won't increase rates at small increments.

The European Central Bank has «limited» room to raise interest rates in smaller increments as government policies to cushion households and businesses from soaring energy prices will keep eurozone inflation higher for longer, a senior policymaker has said. Schnabel told a conference in London, signalling her desire to continue with rate rises of 0.75 percentage points, «the largest risk for central banks remains a policy that is falsely calibrated on the assumption of a fast decline in inflation, and hence on an underestimation of inflation persistence». She said the impact of government support measures meant the ECB would have «to raise rates further, probably into restrictive territory», where growth would be constrained, to bring eurozone inflation down from a record level of 10.7 per cent in the year to October and back to its 2 per cent target. «Many fiscal measures that are popular among the electorate, such as tight price caps or broad subsidies, risk fuelling medium-term inflation further,» she said, adding that this «could force monetary policy to raise interest rates beyond the level that would be seen as appropriate without fiscal stimulus».

With expectations rising that eurozone inflation will soon peak as the currency bloc is forecast to enter a recession next year, investors are pricing in a high probability of the ECB raising rates by 0.5 percentage points next month after 0.75 percentage point increases at its last two policy meetings. The minutes of last month’s ECB meeting, out yesterday, revealed intensifying concern about «an increasing risk that inflation might become entrenched and that second-round effects and a wage-price spiral could emerge». The meeting account «contrasts with the markets’ initial relatively dovish interpretation of October’s press conference and signals that policy tightening has some way to go», said Ken Wattret at S&P Global Market Intelligence.

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