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ECB hawks call for growth-curbing rate hikes to tame inflation

FILE PHOTO: European flags are seen in front of the ECB building, in Frankfurt

By Balazs Koranyi

LJUBLJANA (Reuters) -Three of the European Central Bank's most outspoken policy hawks called on Thursday for raising interest rates to a level that weakens growth in order to curb high inflation, which they said was at a growing risk of taking hold in the euro zone.

With euro zone inflation running in double digits, the ECB has been raising rates at a record pace even as the euro zone economy heads for recession.

This has prompted some policymakers to weigh the benefits of future increases against the risk to growth.

But ECB board member Isabel Schnabel, the leading voice among policymakers who favour higher borrowing costs, said the central bank should press ahead and likely reach "restrictive territory" - a call echoed by the central bankers of Slovenia and Slovakia.

"There is no time for monetary policy to pause," Schnabel told an audience at the Bank of Slovenia. "We will need to raise rates further, probably into restrictive territory."

The host of event, the Slovenian central bank's governor Bostjan Vasle, and his Slovak counterpart Peter Kazimir repeated her prediction moments later on the same panel.

The ECB's deposit rate now stands at 1.5% and economists estimate that the neutral level, which is neither restrictive nor stimulative, is somewhere between 1.5% and 2%.

Schnabel pointed to a number of indicators suggesting high price-growth was at risk of becoming entrenched, such as rising wages and so called underlying inflation, which strips out the most volatile prices, but also market and consumer expectations.

This meant that a shallow recession was unlikely to bring inflation down to the ECB's 2% target, she added.

"Only a deep recession with a sharp rise in unemployment could be expected to significantly dampen inflation pressure," Schnabel said. "This is currently unlikely, not least due to the robust labour market, large excess savings and the massive fiscal support."

Kazimir also said euro zone governments were spending too much to support households through the energy crisis, adding to already excessive inflationary pressures.

"The measures adopted at present are often far from the transitory and targeted interventions we would like to see," Kazimir told the event.

Vasle joined a number of policymakers calling for the ECB to start unwinding its multi-trillion-euro bond holdings next year as part of its fight against inflation.

(Writing by Francesco Canepa; Editing by Toby Chopra and Alex Richardson)