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ECB's Makhlouf ready for two more rate hikes, open-minded beyond that

FILE PHOTO: Interview with Governor of the Central Bank of Ireland, in Dublin

By Balazs Koranyi

DUBROVNIK, Croatia (Reuters) - Another two rate hikes from the European Central Bank are still on the cards but moves further out remain open to debate as inflation is still stubborn, Irish central bank chief Gabriel Makhlouf said.

The ECB has raised rates by a combined 375 basis points since last July, the most within a year, and the debate is now increasingly shifting to where the tightening should end in the fight to get the euro zone's runaway inflation back to the ECB's 2% target.

"My gut feeling at the moment from everything I have seen is that we'll be moving rates again at our June meeting and it wouldn't surprise me if we're moving again at our July meeting," Makhlouf told Reuters in an interview.

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"Another two steps seem to be my lead options," Makhlouf, who sits on the ECB's rate-setting Governing Council, said.

The comments line Makhlouf up with a growing group of policymakers arguing that the well flagged June 15 rate hike is unlikely to be the last one.

Bundesbank President Joachim Nagel said “several” more hikes are still coming while his Dutch counterpart Klaas Knot said that at least two more hikes are required.

France’s Francois Villeroy de Galhau took a more nuanced view and said that the ECB should hit peak rates by the end of the September, or over the next three meetings.

Markets now expect roughly 65 basis points of rate hikes in the coming months, suggesting that increases in June and July are fully priced in and investors are split on the September move.

"I'm very, very relaxed about what markets are pricing at the moment, partly because their pricing for the next couple of meetings is not inconsistent with where I am," Makhlouf said. "As for what they price in 2024, that’s just a punt, as far as I’m concerned."

He said the economy is healthy enough to withstand higher rates and a recession is not a prerequisite for taming price growth, adding policy was already starting to make an impact.

"I think that we can definitely achieve our target without a recession. The underlying dynamics do appear to be pretty strong, and the labour market is in robust health," he said.

Rate hikes are still needed as underlying price growth in the euro zone shows few signs of abating, even as overall inflation at 7% is now well off its double digit highs of last autumn.

While ECB chief economist Philip Lane said that core inflation, which excludes volatile food and fuel prices, will eventually follow headline prices lower, others argue this is not evident in data yet.

Makhlouf said both arguments had merit and while the upward momentum in core inflation appears to have slowed, some price pressures, particularly for food, are still building.

But Makhlouf appeared to be relaxed about the labour market, a worry for some because record low unemployment threatened to fuel an already high rate of wage growth.

"So far we haven’t seen wage settlements on the pan euro area level that raises concerns, even if in some countries there have been wage settlement that are going to be problematic for those countries," Makhlouf said.

(Reporting by Balazs Koranyi; Editing by Toby Chopra)