ECB’s Schnabel: Won’t Endanger Recovery by Tightening Too Soon

11 September 2020

By David Barwick – FRANKFURT (EconoStream) – The European Central Bank will take care not to withdraw monetary accommodation too soon and throttle the process of recovering from the pandemic’s economic fallout, Executive Board member Isabel Schnabel said Friday.

In a speech at the Centre for European Reform and the Eurofi Financial Forum in Berlin, Schnabel, according to a text provided by the ECB, added that all the same, the ECB will one day have to tighten its stance, a day governments must prepare for.

‘The ECB will be careful to not choke the incipient recovery by initiating a tighter policy too early’, she said. ‘But when the crisis has been overcome and inflation has returned to a sustained path towards our aim, the ECB needs to step back, in line with its mandate, and in line with its symmetric target, as it did towards the end of 2018 when the Governing Council decided to end net asset purchases.’

Governments are thus called on to ‘make a credible commitment to regain fiscal space once the economy has recovered from the crisis’, she said. Where debt is too high for too long, growth will be stunted and the region weakened, she said, noting governments’ historical failure ‘to take advantage of the good times to create a sufficient amount of policy space.’

Schnabel’s comments were intended to substantiate the ECB’s faithfulness to the euro’s founding principle of monetary dominance, both in the context of its response to the current crisis as well as more generally.

‘Monetary policy is not guided by the wish to lower the public debt burden but by its mandate of price stability’, she insisted. ‘There is, in fact, no evidence of a feedback loop from sovereign debt developments to monetary policy decisions.’

Schnabel cited weak inflation expectations as evidence of no fiscal dominance. Although off their historic lows, expectations ‘remain well below the levels that we would consider consistent with our medium-term aim of below, but close to, 2%’, she said. ‘Too low rather than too high inflation remains the main predicament of our times.’