By David Barwick – FRANKFURT (EconoStream) – The European Central Bank is prepared to modify its stance as warranted to support a return to price stability and to ensure the smooth transmission of its monetary policy, ECB Executive Board member Isabel Schnabel said on Thursday.

At a webinar co-organised by the SAFE Policy Center, Schnabel primarily recounted the ECB’s policy response and shared “tentative evidence” that the measures have been working as desired, according to a text of her remarks made available by the ECB.

The Governing Council is “ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner and to avoid fragmentation that may hamper the smooth transmission of our monetary policy,” she said.

Schnabel defended the ECB’s reluctance to further lower interest rates in response to the crisis, suggesting that this reflected Council members’ “widely shared sense of the benefits and costs of the various instruments that we had employed in the recent past.”

A deposit facility rate cut, she continued, “would have been unlikely to support sentiment and market functioning at a time when banks’ profitability was already expected to come under additional pressure due to the crisis.”

Although energy price falls would lead to a decrease in inflation over the short term, with March HICP “a harbinger of what can be expected in coming months”, she said, with respect to the medium term, initial signs are that policy measures by central banks and other authorities globally “have already contributed to restoring cautious confidence among professional forecasters.”

Schnabel pointed to the forecasts of global macroeconomic survey firm Consensus Economics calling for a V-shaped recovery in Europe in which next year’s rebound in output would be almost as large as this year’s drop.

Inflation expectations beyond this year have therefore held up well, she said, with private-sector projections envisioning a convergence of euro area HICP to levels closer to price stability in three to four years.

Still, she noted, uncertainty is high and the IMF’s most recent forecasts see next year’s rebound as being significantly weaker in magnitude than this year’s contraction.