European Central Bank Executive Board member Isabel Schnabel pushed for this month’s decision statement to signal possible interest-rate hiking in future, according to people with knowledge of the matter.
(Bloomberg) — European Central Bank Executive Board member Isabel Schnabel pushed for this month’s decision statement to signal possible interest-rate hiking in future, according to people with knowledge of the matter.
Schnabel, the official in charge of markets, argued against the Governing Council’s avoidance of explicit wording on the path of monetary policy after the half-point hike in borrowing costs on March 16, said the people, who declined to be identified because such meetings are private.
Instead, President Christine Lagarde offered only a verbal assurance that policymakers may keep raising rates if ECB projections were to prove realistic in due course. The following week, the Federal Reserve also pared back a pledge on future tightening.
An ECB official declined to comment on the Governing Council’s March 16 discussion.
The insight on Schnabel’s position casts new light on the debate this month at the first major central bank to deliver a scheduled decision on borrowing costs since the outbreak of financial turbulence crippled banks from the US to Switzerland.
Her argument might suggest confidence in the resilience of financial markets, and in the health of euro-zone banks, as seen by the person most responsible for monitoring ECB interactions with investors. In that role, Schnabel leads discussions in Governing Council meetings along with Chief Economist Philip Lane.
It also signals how the inflation threat is perceived by one of the most hawkish ECB officials. In that sense, Schnabel’s position articulates a possible monetary-policy approach contained in Lagarde’s insistence last week that there is “no trade-off between price stability and financial stability.”
The president provided only a cautious signal on tightening after the March decision, which was overshadowed by the crisis surrounding Credit Suisse Group AG. On the eve of the ECB rate hike, Swiss authorities offered a liquidity lifeline to the stricken bank before UBS Group AG took it over at the following weekend.
“If our baseline was to persist when the uncertainty reduces, we know that we have a lot more ground to cover,” Lagarde told reporters on March 16. “But it’s a big caveat.”
Last week, she insisted to European Parliament lawmakers that providing a firmer signal wouldn’t have been appropriate.
“We would have indicated that subsequent hikes would be needed, but in the face of the uncertainty that we had, it would not and it was not the right policy indication to give,” Lagarde said.
Speaking in New York on Monday, Schnabel said “we have to see if the previous baseline we had” — characterized by upside risks to inflation — still holds when the ECB makes its next decision on May 4.
Last week, hawkish policymakers became gradually bolder about specifying the need for further tightening.
“Without this episode, the risks to the inflation outlook were so strongly tilted to the upside that I would have been very convinced that we need to make another step in May,” Dutch central-bank chief Klaas Knot said in Amsterdam on Thursday. “I still think that we need to make another step in May, but I don’t know the size of that.”
By contrast, dovish officials have continued to call for caution.
“We should make no precommitment,” Yannis Stournaras, the Greek central-bank governor, said the same day as Knot spoke. “I’m glad that we decided in our last meeting that we’ll give no forward guidance.”
Turbulence resumed after both of them spoke, with Deutsche Bank AG’s stock falling on Friday by the most in three years. The lender’s shares have since risen, but officials remain wary.
“In light of the current elevated uncertainty, the most sensible thing to do is to emphasize that our future monetary-policy decisions will depend more than ever on how the different sources of risk materialize, including experiences in recent days in financial markets,” Spanish Governor Pablo Hernandez de Cos said on Monday.
–With assistance from Alexander Weber and Jonnelle Marte.
(Updates with Schnabel comments in 12th paragraph)
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