(Bloomberg) — European Central Bank Executive Board member Isabel Schnabel said growth prospects for the euro area are more dire than officials predicted in June, while underlying inflation remains “stubbornly high.”
(Bloomberg) — European Central Bank Executive Board member Isabel Schnabel said growth prospects for the euro area are more dire than officials predicted in June, while underlying inflation remains “stubbornly high.”
Highlighting the challenge that the current state of the economy poses to policymakers, the official in charge of markets avoided committing to specific action in September, saying that it’s impossible to know today whether borrowing costs still have to rise.
Recent developments “point to growth prospects being weaker than foreseen in the baseline scenario,” she said. “But underlying price pressures remain stubbornly high, with domestic factors now being the main drivers of inflation in the euro area.”
The remarks emphasize the quandary for policymakers as they approach a cliffhanger decision on whether to raise interest rates for a 10th consecutive meeting or to pause and let their tightening so far feed through with its current level of constriction.
ECB officials will meet in two weeks, and key to their deliberations are numbers that started arriving on Wednesday which showed price gains slowed less than expected in Germany while they accelerated in France and Spain. Euro-zone data later on Thursday may confirm that underlying inflation is stuck above 5%.
Schnabel, who has been one of the more hawkish officials during the current tightening cycle, insisted that restrictive rates will be needed to tame consumer prices, while acknowledging that the ECB’s windscreen has become distinctly clouded.
“Should we judge that the policy stance is inconsistent with a timely return of inflation to our 2% target, a further increase in interest rates would be warranted,” she said. “Should our assessment of the transmission of monetary policy suggest that the pace of disinflation is proceeding as desired, we may afford to wait until our next meeting to gather more evidence.”
In any case, Schnabel signaled that constriction is here to stay.
“A sufficiently restrictive monetary policy is critical for bringing inflation back to our 2% target in a timely manner,” she said. “We cannot predict where the peak rate is going to be, or for how long rates will have to be held at restrictive levels. We can also not commit to future actions.”
Money markets pared monetary-policy tightening wagers after the remarks and now expect policymakers to keep the deposit rate on hold at 3.75% when they meet next month. That stands in contrast to earlier when bets were firmed on a quarter-point increase after French inflation accelerated.
The yield on German 2-year debt, which is among the most sensitive to changes in policy, fell 4 basis points to hover just above 3%, a level that has held firm so far this week.
Hawkish policy makers including Austria’s Robert Holzmann have already signaled that they may back another hike next month, though his Finnish colleague Tuomas Valimaki said Tuesday that the outcome of the Sept. 14 gathering is “totally open.”
Dovish officials have focused on the deteriorating economic outlook, which Schnabel acknowledged is disappointing. She cautioned however that the deterioration doesn’t mean a serious slump is in the offing.
“There are indications that the euro area economy may not be on the brink of a deep or prolonged recession,” she said.
Inflation numbers for the whole euro area due at 11:00 a.m. Frankfurt time. Then 2 1/2 hours later, the minutes of the ECB’s July decision will be released, followed later by a speech by Schnabel’s colleague, Vice President Luis de Guindos.
–With assistance from James Hirai.
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