ECB’s Schnabel: Too-Low Inflation to Remain the Bigger Worry

31 January 2021

By David Barwick – FRANKFURT (Econostream) – Despite the ‘interesting’ recent pick-up in German inflation, price pressures overall are likely to remain weak, so that too-low inflation will continue to be a greater worry than too-high, European Central Bank Executive Board member Isabel Schnabel said Sunday.

In an interview with German national radio channel Deutschlandfunk, the text of which the ECB made available, Schnabel said that the ECB’s bond purchases hinged on the evolution of the pandemic.

Asked whether the ECB needed to prepare for higher inflation, Schnabel called the flash estimate of January inflation in Germany ‘an interesting short-term movement’ that came in ‘surprisingly high’, but emphasised the impact of one-off effects.

Moreover, she said, pandemic-induced shifts in consumption have made measurement of inflation and comparison of readings over time difficult. Given energy prices declined last year, inflation should increase this year, she said.

This is not a sustained development, she said. ‘We are faced with very weak demand. And it does not look like this is going to fundamentally change. This is why we continue to be more worried about inflation being too low rather than too high’, she said.

As for the ECB’s bond buying under the pandemic emergency purchase programme (PEPP), ‘[t]hat depends on how the pandemic evolves’, she said. ‘The economic performance will largely be determined by how quickly we manage to reach what is known as herd immunity.’

The ECB hopes that the measures it took in December as part of the recalibration of its policy stance would prove sufficient, she said.

With respect to conventional monetary policy, Schnabel asserted that ‘raising interest rates in the current situation would have disastrous effects.’

GDP growth in the euro area last quarter, a first estimate of which will be released on Tuesday, was negative, she said. The worsening of the pandemic suggests that ‘a very weak first quarter is to be expected this year’, but how fast vaccination takes place will be ‘decisive’ for further growth, she said.

Once lockdown measures are withdrawn, a ‘strong recovery similar to what we saw last year’ could ensue, leading to growth this year of close to 4%, she said.

Schnabel urged EU politicians ‘to speed up a little bit’ so that European funding to counter the economic fallout from the pandemic comes online quickly.

The debt incurred to mitigate the crisis would not spawn a new sovereign debt crisis, she said. ‘If the countries return to strong growth after the pandemic, then the higher levels of debt aren’t a problem’, she said.

Asked whether the ECB deliberately conducted government debt purchases in such a way as to stifle risk premia on the sovereign bonds of less fiscally sound Eurozone member states, Schnabel referred to the PEPP’s built-in flexibility.

‘This is because we wanted to ensure that common monetary policy reaches the euro area as a whole’, she said. ‘We had precisely a situation like this in March of last year, when a clear fragmentation occurred in the euro area. At that point, bonds of certain euro area countries were bought in larger amounts. The situation calmed down quickly and it was no longer necessary to buy more bonds from certain countries. This then also led to a decline in the deviations from the capital key.’