European Central Bank officials perceive an increasing likelihood that they will need to hike their benchmark interest rate to 2% or higher to combat record-high inflation in the eurozone despite the likelihood of a recession. Inflation reached 9.1% in August and is expected to remain over the ECB’s 2% objective for the next two years.
The central bank has been hiking interest rates at an unprecedented rate while pushing governments to assist in lowering energy costs. President Christine Lagarde said rates are still far from 2% and that another two or three rises are likely. According to the sources, officials are ready for a recession this winter and slower economic growth next year.
Some found solace in the healthy labor market, which they said should buffer the effect of increasing interest rates. Current ideas, including one for a “reverse tiering system” that restricts pay on particular reserves, were deemed insufficient by policymakers, according to the sources. One source stated that a decision might yet be made before the ECB’s next policy meeting on October 27.