ECB’s Schnabel: Optimistic We’ll Hit Inflation Target Sooner Than Some Expect

14 July 2021

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel said on Wednesday that she was optimistic about prospects for a return to price stability sooner than some anticipate.

In an online discussion of the Peterson Institute for International Economics, Schnabel said that ‘looking forward, I think we are in a better situation’, with inflation dynamics that ‘actually move in a much better direction.’

‘So I’m actually optimistic that we’ll be able to reach our inflation aim maybe sooner than some people expect at the moment’, she added.

Still, the prerequisite pick-up of wage growth was not yet visible, she said, and much depended on this.

In general, inflation is characterised by ‘a lot of volatility at the moment, and a lot of that is due to temporary effects, in particular base effects … and according to our projections, we still think that in the medium term the outlook is going to be subdued’, she said.

At the same time, ‘some of the one-off effects we’re seeing may be more permanent and lead to second-round effects’, she said. ‘I would not even call that upside risks to inflation, but upside chances to inflation.’

Nonetheless, Schnabel made it clear that she was not issuing a call for policy tightening. ‘The worst thing that could happen is that either fiscal or monetary policy tightened prematurely’, she said.

As for the economic outlook, the euro area has ‘surpassed the turning point and we have seen a very strong recovery, which is related in particular to the reopening of the economy’, she said.

The delta and other variants of the coronavirus constitute a new risk, however, ‘and we still have no idea how this is going to play out’, she said. Covid-19 case numbers have ‘spiked quite dramatically’ in some countries, but ‘it’s still too early to tell what this will mean’, she said.

The political will to impose more lockdowns may be limited, she suggested.

Asked how the new monetary policy strategy changed the ECB’s reaction function, Schnabel said that the fact that the Governing Council did not adopt an average inflation targeting regime ‘implies that we have not committed to an intentional overshooting.’ The moderate and transitory overshooting referred to by the new strategy ‘is different from an intentional overshoot’, she said.

‘I think the main point is … that everybody in the Governing Council agrees that we have to avoid a premature tightening of monetary policy’, she said. ‘So what must not happen [is that] we look at our projections or market expectations or whatever indicators we have and we see that at the end of the projection horizon is a 2. So this would not immediately trigger an interest rate hike, but rather we would commit to being much more patient than that.’

The Governing Council needs ‘high confidence in actually seeing this 2 being there in a more durable fashion’, she said. Were there a general tendency to react too quickly by tightening policy, ‘then it’s not surprising that the 2 is never reached’, she said. ‘And I think this is the essence of that sentence in the strategy review.’

The Governing Council itself had see 2% as a target rather than a ceiling, she said, but ‘[g]iven the formulation that we had, this was not very credible.’

The outcome of the review is ‘very strong’ because of the ‘unanimous consent on all parts of the review’, she said.