FRANKFURT (Reuters) -The European Central Bank must raise interest rates further as broad disinflation has not yet started, even if overall price growth has been declining quickly, ECB board member Isabel Schnabel said in a Twitter Q&A on Friday.
The ECB has raised interest rates by 3 percentage points since July and promised another big increase for March, worried that stubbornly high underlying price growth risked perpetuating high inflation.
“Broad disinflation has not started in the euro area,” Schnabel said. “Rates must reach a sufficiently restrictive level … (and) we’ll keep rates high until we see robust evidence that underlying inflation returns to our target.”
“We still have ground to cover,” Schnabel said. “We need to see robust evidence that underlying inflation is returning to our target in a timely and durable manner.”
Inflation has dropped by around 2 percentage points since its peak in October and further drops are likely as natural gas prices retreat and high year earlier figures get knocked from data.
But underlying price growth appears to be stubbornly high leading to fears that price growth could get stuck at levels above the ECB’s 2% target, partly due to quick nominal wage growth.
Schnabel acknowledged that rate hikes will lower economic growth but a recession is not certain and a “soft landing” was still possible.
The ECB will also start running down its oversized bond portfolio from next month to lift borrowing costs and Schnabel argued that some of the recent rise in yields already reflects this.
“The anticipation of balance sheet run-off has already likely contributed to rising bond yields in the euro area,” she said.
The ECB will initially allow 15 billion euros ($16 billion) worth of debt to expire and Schnabel said the market impact of this balance sheet run down should be “largely symmetric” to its past bond purchases.
($1 = 0.9347 euro)
(Reporting by Balazs Koranyi; Editing by Toby Chopra and Jonathan Oatis)
