ECB Brief: Schnabel Reveals Unsuspected Optimism About Regaining Price Stability

14 July 2021

By David Barwick – FRANKFURT (Econostream) – This is a quick take on comments made Wednesday by European Central Bank Executive Board member Isabel Schnabel during an online discussion of the Peterson Institute for International Economics:

  • Although she has suggested upside risks to the medium-term inflation outlook before, today Schnabel expressed a surprising degree of optimism about an earlier-than-expected return to price stability in the euro area. However, she did so without retreating an iota from the mantra of sustained policy support.
  • 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.’
  • Described current inflation as 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.’
  • Expressed more specific reservations by affirming that ‘some of the one-off effects we’re seeing may be more permanent and lead to second-round effects … I would not even call that upside risks to inflation, but upside chances to inflation.’
  • Cautioned however, as before, that the prerequisite pick-up of wage growth was not yet visible.
  • Made 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.’
  • Assessed the economic outlook positively, with the delta variant an important caveat: 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.’, 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.’ Covid-19 case numbers have ‘spiked quite dramatically’ in some countries, but ‘it’s still too early to tell what this will mean.’
  • Explained that the moderate and transitory overshooting referred to by the new strategy ‘is different from an intentional overshoot … I think the main point is … that everybody in the Governing Council agrees that we have to avoid a premature tightening of monetary policy. 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.’ Were there a general tendency to react too quickly by tightening policy, ‘then it’s not surprising that the 2 is never reached. And I think this is the essence of that sentence in the strategy review.’ Schnabel probably does not consider this to represent anything particularly new; weeks before the strategy review concluded, she said 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.’