EXCLUSIVE ECB policymakers want a quick end to bond buying and an early rate hike

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The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany December 8, 2016. REUTERS/Ralph Orlowski/File Photo

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WASHINGTON, April 24 (Reuters) – European Central Bank policymakers want to end their bond-buying program as soon as possible and raise interest rates as early as July, but certainly not later than in July. September, nine sources close to ECB thinking told Reuters.

The ECB has removed stimulus at the slowest pace possible this year, but a surge in inflation is now pushing policymakers to end their nearly decade-long experiment with unconventional support.

The big hurdle so far has been that longer-term forecasts still showed inflation falling back below the ECB’s 2% target, but new estimates shared with policymakers at their meeting on April 14 even showed inflation above the 2024 target, multiple sources said.

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“It was just over 2%, so my interpretation is that all the criteria for raising interest rates are now met,” said one of the sources, who requested anonymity.

Governing Council members have long criticized the ECB for underestimating inflation, which hit 7.5% last month, and they view the new projection as a step in acknowledging reality.

“When (chief economist) Philip (Lane) presented the numbers people cheered,” another source said.

An ECB spokesman declined to comment.

No policy proposals have yet been tabled and the next ECB meeting is still more than a month away, on June 9.

ECB President Christine Lagarde said Friday that bond purchases should end early in the third quarter and that a rate hike this year is likely.

Almost all sources said they expected at least two rate hikes this year, but some argued a third was also possible, although heavily dependent on how markets digest its moves.

Markets are pricing around 85 basis points of increases for this year, or more than three 25 basis point moves, which would take the deposit rate minus 0.5% back into positive territory for the first time since 2014.

Stimulus unwinding, the ECB has long argued is simply a matter of normalizing policy, is an undefined concept with no defined parameters.

Policymakers who spoke to Reuters, however, said normalization should mean returning to the neutral interest rate, which neither stimulates nor hinders growth.

They put it at around 1% to 1.25%, so 150 to 175 basis points above the current rate.

“Reaching that level by the end of 2023 might be reasonable,” said a fifth source.

However, interest rates can only rise once bond purchases are complete and the 9 policymakers, who spoke on condition of anonymity, said this is likely to happen on June 30 or July 1 .

This would mean that the ECB would be in a position by its July 21 meeting to raise its rates.

“Unless the outlook changes drastically, I would choose July,” said a third source.

Some of the sources, however, said they would still prefer to wait until September, partly because new forecasts would then be available and partly to avoid a major policy shift during the summer months when liquidity is weaker.

The ECB last raised interest rates in 2011 on the eve of the bloc’s debt crisis, a move now widely seen as its biggest policy mistake yet.

“The memory of that move still haunts us,” said a fourth source. “Some people fear making a similar mistake.”

The US Federal Reserve is expected to tighten even faster. Markets are pricing in nearly 250 basis points of tightening this year, with 50 basis point hikes expected at some meetings.

All ECB policymakers, however, stressed that the outlook could change radically by then, as Russia’s invasion of Ukraine is a lingering threat to confidence and the COVID-19 pandemic is not. no longer finished.

Some policymakers have said a technical recession, or two consecutive quarters of negative growth, is possible this year, but the full-year figure will still be positive.

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Reporting by Balazs Koranyi; Editing by Alexander Smith

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