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Michael Bonello, governor of the central bank of Malta, spoke out this morning against another potential rate hike in the eurozone, suggesting it could be a threat to the region’s banking system.Bonello said in a speech this morning (via Bloomberg):
The sovereign debt crisis is not yet behind us, and the banking sector in some countries — which is a key finding a solution to the crisis — is still very fragile. We could still see an accentuation of the negative feedback loop from the financial sector to the real economy via the sovereign debt channel. There’s a very high level of uncertainty in this scenario, and I think the risks to growth could well be tilting to the downside. The IMF’s World Economic Outlook has more or less confirmed this view.
And that means he believes raising rates again could be dangerous.
As long as inflation expectations remain well anchored, monetary growth remains moderate, which it is, and there is no clear sign of second-round effects, then we must be careful not to make it more difficult for countries to grow out of their debt problem. In such uncertain circumstances like these, we need to balance doctrine with pragmatism
Bonello may be alone in his dissent for future rate hikes, however, with the outgoing German Bundesbank chief Axel Weber raising alarms over rising inflation this weekend. Lorenzo Bini Smaghi and Juergen Stark have also recently been quoted in support for of the inflation fight.
While the last eurozone inflation report beat expectations, there’s still no reason to think there will definitely be a rate hike at the next ECB meeting. But it seems for certain there will be another in the next few months.
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