ECB’s Schnabel: Must Be Patient, But Also Watch Upside Inflation Risks

17 November 2021

By David Barwick – FRANKFURT (Econostream) – Monetary policymakers have to be patient in the face of possibly only temporarily high inflation, but at the same time be attentive to upside risks, European Central Bank Executive Board member Isabel Schnabel said Wednesday.

While highlighting the presence for ‘the first time in more than a decade’ of ‘measurable upward pressure on inflation’, Schnabel did not dispute the view that inflation would subside clearly over 2022 to below 2%, making the ECB’s conditions for a rate hike ‘very unlikely to be met next year.’

But, as before, Schnabel said the notion of a return to low growth and low inflation was being called increasingly into question, citing forward inflation swap rates. Policymakers in any case should ‘focus on the entire range of possible outcomes’, she urged.

This meant not reacting to ‘a temporary and possibly short-lived inflation spike’, while ‘keeping a watchful eye on the upside risks to inflation that financial markets currently anticipate and retain optionality to be able to act if needed, so as to maintain trust in our determination to defend price stability in a symmetric way and prevent a deanchoring of inflation expectations in both directions.’

Concerns about a sharper and more lasting economic slowdown in the wake of higher energy prices and persistent supply constraints ‘are largely unwarranted’, she said. After all, ‘supply bottlenecks, by their very nature, do not diminish growth potential’, but ‘merely shift activity over time.’

Moreover, these bottlenecks account for a relatively small share of delivery delays, which are due mostly to ‘exceptionally strong demand outpacing pre-pandemic supply’, she said.

With euro area households left ‘largely unscathed’ by the crisis, the issue is one of ‘deficient supply rather than deficient demand’, and demand can potentially support a high level of growth once kinks in supply are worked out, she said.

The lesson of the 1970s oil crisis suggests that high current oil prices shouldn’t change the outlook ‘fundamentally’, she said, given substantially lower dependence on this input. Schnabel cited positive consumer surveys as well as expectations of stronger labour markets.

Moreover, she said, fiscal policy will remain unusually supportive, while contact-intensive services should see progressive gains.

‘All in all, stagnation looks like a distant threat’, she said.