ECB’s Schnabel: Overall Demand Likely to Remain Weak, Keeping Inflation Down
9 April 2021By David Barwick – FRANKFURT (Econostream) – Overall economic demand in Europe will probably remain weak, leading inflation back down after this year’s increase, European Central Bank Executive Board member Isabel Schnabel said on Friday.
In an interview with German weekly Der Spiegel, Schnabel said that a lasting rise of inflation towards the ECB’s price stability objective would be a welcome sign of an economic pick-up, but that this scenario doesn’t reflect the current situation.
‘[P]rices are now rising on the back of many one-off effects’, she said, citing oil prices and the reversal of the VAT reduction. ‘That has an impact, but only in the short term. Our medium-term projections show that the rate of inflation will ease again in 2022, because aggregate demand will presumably remain weak.’
Given how far the ECB remains from achieving its objective, ‘a sustainable rise in the direction of 2% would be good news’, she said when asked when the period of low interest rates would end. ‘That would mean that the economy is gaining momentum and aggregate demand is increasing. Unfortunately, that does not quite match the reality.’
Responding to the suggestion that the ECB could ultimately be unable to hike rates because of heavily indebted euro area countries, Schnabel urged that the latter practice ‘good fiscal policy’ by investing borrowed money in measures to raise potential growth.
The ECB is obligated to pursue price stability and prohibited from monetary financing, she said. ‘And we cannot promise any government that interest rates will remain low forever’, she added. ‘But it will be some time before interest rates start rising again significantly, assuming our inflation forecasts are accurate.’
Even once the ECB does hike rates, only that portion of sovereign debt needing refinancing will immediately become costlier, she said. As long as there is growth, then a debt increase ‘will also be manageable’, she said.
Schnabel said that an indefinite delay in the disbursement of Next Generation EU recovery fund money ‘would be an economic disaster’. It would force Europe ‘to think about alternative solutions, but that could take some time’, she said.
The ECB is watching developments on equity markets ‘very closely’, she said. Although these ‘have not been extreme up to now’ in Europe, ‘there are signs of excesses here too, for example in the real estate market’, she said.
Still, high valuations in the euro area ‘are still justified by higher earnings expectations’, she said. ‘But the risks of a correction are increasing, especially if the economic recovery falls short of expectations.’