ECB should start with 0.25% interest rate hike, says Estonian central banker

The European Central Bank should stick to its plan to start tightening monetary policy by raising interest rates by just 0.25%, said Madis Muller, the policymaker whose country has the euro zone’s highest inflation.

In particular, as reported by Bloomberg, contrary to the calls of his colleagues from other Baltic countries to consider a 0.5% increase in the ECB’s first move, the Estonian central banker said that the bank’s officials should wait until September for such an increase.

“Given the outlook for inflation, it is appropriate to start raising interest rates in July by a quarter of a point (25 basis points),” Muller said in an interview in Dubrovnik, Croatia yesterday, Sunday. “We should continue with a further increase of 50 basis points in September.”

The rate path suggested by Muller is in line with the views of most ECB officials, although two of his Baltic colleagues said last week that a bigger hike should at least be an option for the July 21 decision.

Meanwhile, Slovenia’s Bostjan Vasle said today, Monday, that interest rate hikes “will continue after September, in the fourth quarter and early next year.”

Estonia has the highest inflation in the eurozone, which last month reached 22%, with Lithuania at 20.5% and Latvia at 19% following closely behind.

Regarding inflation, Madis Muller said that “it is mainly due to energy prices, whose increases worldwide are passed on very quickly in our case to consumers”, adding however that “but we also see high inflation in food prices and strong domestic demand”.

The combination of weak growth and high inflation has raised fears of stagflation in the eurozone, an assumption Muller rejected.

“For the eurozone economy, stagnant inflation is not the most likely scenario,” he said.

“Growth prospects have weakened in recent months, but we can still expect some economic growth in the coming years, with questions about natural gas a major risk,” he noted.