ECB Insight: Schnabel Comments Support Expectation That ECB Won’t Rush to Exit

12 July 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel’s comments over the weekend lend credence to the expectation that the ECB will not step on the brakes too quickly even when inflation shows clear signs of revival.

In an interview with German weekly Frankfurter Allgemeine Sonntagszeitung, Schnabel, asked what rate of inflation would result in policy intervention by the ECB, clearly sought to pave the way for overshooting by countering with the observation that ‘[i]n previous years, inflation was too low.’

The various crises up to and including the pandemic made it ‘important to firmly anchor people’s inflation expectations close to our target of 2%’, she said.

A more straightforward answer, at least until the now-published outcome of the strategy review, would have involved some reference to the oft-enough reiterated forward guidance, which in every recent introductory statement has conditioned a rate hike on the robust convergence of inflation, reflected in underlying dynamics, to the ECB’s (previous) price stability target.

That forward guidance must change in light of the strategy review, and Schnabel may have given a foretaste of how it could wind up looking, also given ECB President Christine Lagarde’s announcement last Thursday that the new introductory statement would be ‘less jargonic’.

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

Schnabel offered no new insight into the specifics of overshooting, simply reiterating the equal undesirability of persistent deviations from target in either direction and the possibility of ‘a transitory period’ of inflation ‘moderately’ above 2%.

While her entire approach to the question of what would trigger an ECB reaction sounds a bit more dovish than it would have very recently and was naturally worded with the revised strategy in mind, in a practical sense arguably little has changed from her perspective.

Some weeks ago, Schnabel expressed the view that the ECB’s existing forward guidance already signalled a willingness to overshoot ‘to a certain degree, because we say that we will not raise our policy rates until we see that the robust convergence to our inflation aim has been consistently reflected in underlying inflation dynamics.’

‘There are certainly ways to make this commitment clearer’, she added at the time, and the ECB has now done so.

Schnabel again implied upside risks to the ECB’s projection of 1.4% HICP in 2023, saying that although this forecast ‘is surrounded by uncertainty, I am sure that we will not experience excessively high inflation.’

She has expressed scepticism about the forecast previously, saying six weeks ago that while the ECB’s baseline assumes transitory factors are behind currently high inflation, ‘we cannot be sure.’

In her latest interview, she again tied the uncertainty about the medium-term inflation outlook to the interaction of supply and demand in the context of economic reopening and promised that the ECB would watch relevant developments ‘very closely’.