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The ECB needs to be ready to weather the heat and raise rates further, Schnabel says

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FRANKFURT (RockedBuzz via Reuters) – The European Central Bank must be ready to weather the heat and hike interest rates further, even more than the market expects, if that is needed to bring down inflation, the ECB policymaker said Isabel Schnabel in an interview published on Saturday .

The ECB hiked rates for the fourth consecutive time last week and hinted at further hikes, jolting euro-zone bond markets and triggering a backlash from the Italian government.

Investors now expect the rate the ECB pays on bank deposits, currently at 2%, to rise to 3.4% next year, up from a peak of 2.75% expected before last week’s decision.

Schnabel, the leading voice in the ECB’s hawkish camp that led the recent string of hikes, has opened the door to raise the deposit rate even beyond market expectations if the inflation outlook calls for it.

“Whether we still need to go higher will depend on the future inflation outlook,” he told German newspaper Frankfurter Allgemeine Zeitung.

He added that the ECB will focus on medium-term inflation expectations, rather than current readings, and saw little risk of raising borrowing costs too much at the moment, given that real interest rates are still very low.

Three top Italian ministers have criticized the ECB’s latest decision, which has pushed up borrowing costs for a debt-laden Italy.

Schnabel said the ECB should resist the pressure.

“We can expect pushback to increase and we have to resist,” he said in the interview. “This is exactly why central banks are independent.” (This story has been re-archived to correct the title)

(Report by Francesco Canepa; editing by Philippa Fletcher and Hugh Lawson)