Markets may still be underestimating how high ECB rates have to go -Rehn

HELSINKI (Reuters) -The European Central Bank will need big rate hikes at least at its next two meetings and markets may still be underestimating how high interest rates will have to go, Finnish central bank chief Olli Rehn said on Friday.

The ECB raised rates by a half a percentage point to 2% on Thursday and promised a “steady pace” of hikes ahead, a compromise decision after a large group of conservative policymakers pushed for a bigger increase.

Rehn said that exceptionally high inflation could mean half a percentage point rate hikes were needed at each of the ECB’s next two meetings, unusually extensive commentary for a bank that has recently shunned giving guidance on rates.

“We will stay the course as President (Christine) Lagarde yesterday indicated and this will likely mean 50 basis point rate hikes in the coming meetings, at least as far as I see in February, and March,” Rehn told a news conference.

“We will stay the course and we will do whatever it takes to contain inflation and stabilize it at the target,” he said. “There is still quite some way to go.”

Lagarde on Thursday warned that market pricing indicating the expected top of the interest rate cycle, known as the terminal rate, may be too low as those rates are inconsistent with inflation easing back to 2% in a timely manner.

Investors quickly reacted and the pricing of the terminal rate rose from around 2.9% to around 3.1-3.2%. Rehn however said this may still not be enough.

“Whether the expectation of the terminal rate by the markets is sufficient remains to be seen. I am not fully convinced of that for the moment,” Rehn said.

(Reporting by Essi Lehto, writing by Balazs Koranyi; Editing by Hugh Lawson)