The European Central Bank may keep raising rates in the near future, but they are unlikely to be be as large as last week’s 75-basis-point rate hike, said ECB Governing Council member Edward Scicluna.
“This won’t be the only rate hike and … there are several others coming,” Scicluna, who is also governor of the Central Bank of Malta, told CNBC’s Silvia Amaro on Monday.
Last Thursday, the ECB raised rates by an unprecedented 75 basis points, taking its benchmark deposit rate to 0.75%. The bank also revised up its inflation expectations for 2022 to an average of 8.1%.
Scicluna said he does not think 75 basis points is going to be the norm in the short term. That’s because pressures on the main source of Europe’s inflation — energy and food — will ease, he added.
“We believe that the supply side, or source of this inflation, will abate, perhaps because of things happening in the U.S. and globally, and therefore prices of commodities and energy would subside,” he said.
Scicluna cautioned that central banks are limited in what it can do to fight supply-side inflation — the kind that Europe is facing.
“The source of [our] inflation is not demand as in the U.S., it’s supply… and therefore, the instruments of any central bank are very limited.”
Other analysts have expressed the same sentiment.
Raising interest rates to control inflation spurred by demand is not a solution, as higher prices are in this case driven by supply chain shocks, MBMG Group managing partner Paul Gambles told CNBC in July.
He added that supply is “very difficult” to manage, across various industries and businesses, who face many challenges “turning the taps back on.”
‘Can’t afford to cushion everybody’
Scicluna raised concerns that current measures employed by European governments to alleviate the pain of soaring energy costs could be inflationary.
“We’re sort of advising that the help the governments are now being pushed into giving at least has to be targeted for the vulnerable households,” he said, adding that they “can’t afford to cushion everybody all the time.”
Last week, British Prime Minister Liz Truss announced a cap on energy bills to help with skyrocketing energy costs. It was announced that a typical household will pay no more than £2,500 ($2,920) per year for each of the next two years.
France implemented a gas price freeze and caps on power prices. Norway, for its part, covers up to 90% of power bills above a certain rate.
“The cost to the deficit and the debt would only exacerbate … they would get worse,” Scicluna said.
Source: CNBC
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