ECB’s Schnabel: Tightening Policy Too Soon Would Be Biggest Mistake

12 January 2021

By David Barwick – FRANKFURT (Econostream) – A premature withdrawal of economic policy support would be a grave error, European Central Bank Executive Board member Isabel Schnabel said Tuesday.

In an interview with Austrian daily Der Standard, Schnabel said that once the pandemic is over, governments would need to get their fiscal houses in order so as to be ready for future crises.

‘However, one must be careful not to start consolidating too soon’, she said. ‘That would be the biggest economic policy mistake that could be made – tightening monetary and fiscal policy too soon.’

The downside impact of the pandemic on inflation will dissipate this year in the wake of the reversal of the German VAT reduction and a rebound in energy prices, Schnabel said.

While inflation may gain ‘[s]ome momentum’, for example if vaccination goes faster than expected and pent-up demand is unleashed, ‘such a short-term development should not be mistaken for a sustained increase in inflation, which is likely to only emerge very slowly’, she said.

‘That is why it would not significantly influence our monetary policy decisions, which are oriented towards a medium-term horizon’, she said. Inflation is more likely to be held back by weak demand than invigorated by capacity bottlenecks, she said.