ECB’s Schnabel: Pandemic to Suppress Core inflation Very Long Time

27 June 2020

By David Barwick – FRANKFURT (EconoStream) – European Central Bank Executive Board member Isabel Schnabel on Saturday painted a bleak picture with respect to the outlook for growth and inflation in the aftermath of the pandemic.

In remarks made at the Petersberger Sommerdialog, Schnabel, according to a text provided by the ECB, suggested that core inflation would remain depressed for a very long time and that many sectors of the economy faced permanent constraints due to changes induced by the pandemic.

Monetary authorities’ willingness to step into the breach during the initial phase of the crisis stabilized financial markets, she said. Notwithstanding decisive action early on, the second phase, which she defined as the short to medium term, would only bring a gradual economic recovery, she said, during which ‘[i]nflation could remain at close to 0% well into the next year, and even negative inflation rates are possible.’

Price stability being a medium-term concept, she said, short-term deviations owing to transient factors do not necessarily warrant a policy response. Much of the current decline in inflation reflects energy price weakness, she noted. However, core measures that strip out the impact of food and energy ‘will remain significantly below projections from as recently as March, and will do so for a very long time’, she said.

Against this backdrop, the Governing Council decided at its June 4 meeting that further policy action was warranted because members ‘unanimously agreed that the danger of such low inflation taking hold and leading to lower wages, growth and investment was too high, due both to the severity of the crisis and the preceding weak price pressures’, she said.

As for the pandemic’s economic implications, these ‘will presumably reach far beyond the current year’ and include ‘noticeably higher’ unemployment in two years, she said. The fallout will thus be ‘not only temporary, but structural’, she said, adding that ‘productivity in many service sectors may be permanently affected, and certain industries will probably never return to their pre-crisis levels.’

Schnabel cited ECB estimates showing that the major policy decisions made by the ECB since March should add 1.3 points to output and 0.8 point to annual HICP over the forecast horizon and thus through 2022.

Echoing ECB Chief Economist Philip Lane from earlier in the week, she said that the projections ‘may, in fact, be rather conservative, as empirical studies show that during a very severe economic downturn the impact of deteriorating financing conditions can be several times as high as in normal times.’