ECB’s Schnabel: Tightening of Monetary Policy Would Have to Be Gradual

11 May 2021

By David Barwick – FRANKFURT (Econostream) – Were the European Central Bank to decide that it was time to undo its expansionary policy measures, the process would have to be gradual enough for everyone to be able to adapt, Executive Board member Isabel Schnabel said on Tuesday.

In an interview with German television news channel ntv, Schnabel indicated that she saw no sustainable return of significantly higher inflation, even if in the context of the current increase of German HICP ‘in Germany we expect that inflation could well be higher than 3%.’

This warranted no rate hike, she said, the point being ‘that we assume that these are temporary changes, temporary fluctuations, and our monetary policy strategy is medium-term oriented, which means that we look through all these short-term fluctuations.’

Massive economic stimulus was unlikely to produce durably high inflation, having simply replaced demand that had disappeared due to the pandemic, she said.

‘Uncertainty is very high, so of course we don't know exactly what will happen, but we have indicators’, she said, citing job markets. ‘And when we look at what is happening there, we do not see this wage pressure so far … In fact, wages are rising relatively slowly, especially in Germany. And wage dynamics are absolutely crucial for price dynamics.’

The ECB in any case sticks to its price stability mandate, she said, ‘and as long as price developments are as we are forecasting them at the moment ... it is absolutely clear that our monetary policy has to remain expansionary, because we are well below our inflation target.’

‘If this dynamic changes and if we actually see that there would suddenly be a very rapid inflation development, which is not at all apparent at the moment ... then of course we have to adjust our measures and of course we have to do it gradually’, she continued. ‘We know that we can't change immediately from a situation in which monetary policy is extreme, but we have to do it ... gradually. You have to do it gradually, you have to prepare it, above all through communication, so that everyone has the opportunity to gradually adapt to it.’

Hopefully the point would eventually come at which such a process can take place, she said.

Schnabel said member countries’ indebtedness was not a major issue in this context, given that average maturity of sovereign debt had risen, ‘which means that if interest rates go up, it won't affect the entire debt level in one fell swoop’.