ECB’s Schnabel: 2023 Inflation Forecast ‘Surrounded by Uncertainty’

10 July, 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s medium-term inflation projection is surrounded by uncertainty, Executive Board member Isabel Schnabel said on Saturday.

In an interview with German weekly Frankfurter Allgemeine Sonntagszeitung posted to the ECB’s website, Schnabel said that the ECB had not lost control of inflation and that currently high readings were temporary.

The ECB’s expectation of 2023 HICP is only 1.4%, she reminded. ‘Though that is surrounded by uncertainty, I am sure that we will not experience excessively high inflation’, she said.

The ECB will watch ‘very closely’ how supply and demand evolve, but a sustainable recovery of inflation depends on ‘whether wages also rise and amplify inflation through second-round effects’, she said. ‘So far we have seen little evidence of that – also in Germany.’

Asked what level of inflation would lead the ECB to intervene, Schnabel observed that inflation had been too low, making it ‘important to firmly anchor people’s inflation expectations close to our target of 2%.’

‘Moderately higher inflation is a sign of a better economic outlook’, she continued. ‘We have to support this with our monetary policy for as long as it takes to achieve our medium-term inflation target.’

Schnabel expressed confidence in the ability of high-debt member states to handle an eventual rate hike. ‘Governments will manage this’, she said, citing higher average maturities of sovereign debt and arguing that higher interest rates would only apply to the portion of the debt needing refinancing.

As for the higher inflation objective allowing quantitative easing for longer, Schnabel said the ECB had ‘yet to decide on the concrete effects that the new strategy will have on our current monetary policy stance.’

Price stability has to be achieved sustainably, she said, adding that bond purchases were ‘part of our standard toolkit.’

The outcome of the ECB’s strategy review did not mean people needed to worry about higher inflation because the increase of the objective was ‘minimal’ and ‘creates space so that our monetary policy can have its stabilising effect’, she said.

The symmetry of the new inflation target meant that ‘inflation may sometimes be slightly above it or below’, she said. Monetary authorities ‘regard persistent negative and positive deviations as equally undesirable.’

The Governing Council unanimously agreed that ‘especially forceful or persistent policy measures’ required near the effective lower bound ‘may also imply a transitory period in which inflation is moderately above the target of 2%’, she said.