ECB's Knot says 50 bps July rate hike possible if inflation broadens

AMSTERDAM (Reuters) - The European Central Bank should raise its key interest rate by 25 basis points in July but should not yet rule out a bigger increase, Dutch central bank chief Klaas Knot told Dutch TV programme College Tour.

"The first interest rate hike is now being priced in for the monetary policy meeting of 21 July, and that seems realistic to me," Knot said.

He added that the ECB should, however, keep the door open to a bigger move if incoming data over the next few months would suggest that inflation is "broadening further or accumulating".

"If that is the case, a bigger increase must not be excluded either," Knot said. "In that case a logical next step would amount (to) half a percentage point."

Financial markets currently price 97 basis points of hikes in the ECB's minus 0.5% deposit rate over the remainder of the year, with the first move expected in for July and subsequent moves at each policy meeting this year.

The ECB will next meet on June 9 but has essentially ruled out a rate hike then as it continues to hoover up government debt.

Its guidance stipulates that rates can only rise once the bond buys end, now expected at around mid-year.

Rate hikes are becoming pressing as inflation, at a record high 7.5%, is likely to stay above the ECB's 2% target for years to come with underlying price pressure also broadening.

(Reporting by Bart Meier; Writing by Balazs Koranyi; Editing by Tomasz Janowski)