The European Central Bank will need to see a strong sign that underlying price growth is slowing to its 2% goal before borrowing costs can be lowered again, Executive Board member Isabel Schnabel said.
(Bloomberg) — The European Central Bank will need to see a strong sign that underlying price growth is slowing to its 2% goal before borrowing costs can be lowered again, Executive Board member Isabel Schnabel said.
“Rates must reach a sufficiently restrictive level. We need to see that our policies are being transmitted to the economy,” she said in a Q&A session on Twitter. “We’ll keep rates high until we see robust evidence that underlying inflation returns to our target in a timely and durable manner.”
The ECB raised interest rates by 50 basis points this month to battle the worst bout of inflation since its creation and pledged to take the same step at its meeting in March. Economists predict another quarter-point hike thereafter before a pause, while market bets suggest a rate peak of around 3.5%, up from 2.5% now.
Schnabel wouldn’t be drawn on the size of a potential May rate increase, saying it will “depend on incoming data and our assessment of the inflation outlook.”
Schnabel also said that the time lags with which policy tightening affects the economy are “highly uncertain.”
“Therefore, we are closely monitoring the degree to which our measures are becoming restrictive based on incoming data,” she said. “We cannot yet claim victory in taming inflation.”
Further comments by Schnabel:
- “We need to counter high inflation by tightening monetary policy. At the moment, new lending operations, even if green, are not in line with our price stability mandate”
- “We will stay the course in raising interest rates to bring inflation back to our 2% target in a timely manner”
- “The economy has been subject to unprecedented shocks, such as the pandemic and the horrible war in Ukraine. This has created exceptional challenges for all professional forecasters. We are continuously working to improve our models”
- “The anticipation of balance sheet run-off has already likely contributed to rising bond yields in the euro area. We would expect the effects of QE and QT to be largely symmetric”
- “Tighter credit conditions are a first indication that monetary policy is becoming effective. But they also reflect banks’ risk perceptions that may change if the economy improves. Slower loan growth is an essential part of the transmission mechanism”
- “Tighter financing conditions dampen economic demand and thereby economic activity. This does not necessarily lead to a recession. A soft landing is possible but not guaranteed”
- “The return of a low inflation, low growth environment with low interest rates is not my baseline but cannot be excluded. It depends on how big structural changes, like the green transition, demography, digitalization, globalization, will play out”
(Updates with comment on May rate hike in fourth paragraph, additional quotes at end of story)
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