ECB Insight: Schnabel Hawkish on Growth, Inflation; Sceptical of Asset Buys’ Cost-Benefit Ratio

23 November 2021

By David Barwick – FRANKFURT (Econostream) – Today’s interview by the European Central Bank’s Isabel Schnabel offered a broad and insightful view of how the most hawkish member of the Executive Board sees various key aspects of monetary policy just three weeks before one of the most important recent meetings of the Governing Council.

She argued that the recovery was intact and inflation risks were on the upside, and sounded sceptical about a need to increase the purchase volumes under the asset purchase programme (APP), citing diminishing returns and increasing side effects.

Indeed, the latter observations of hers in particular might lead a cynical observer to wonder if she was recommending herself as a successor for departing Bundesbank President Jens Weidmann, a topic she naturally refused to be drawn out about.

However, there is nothing new about Schnabel standing out as the lone hawkish voice on the ECB Board, and it is her colleagues, including President Christine Lagarde, who have increasingly had to see things Schnabel’s way.

  • Like others, Schnabel framed her view of economic developments in the context of a ‘much stronger’ 2Q than anticipated, dismissed the idea that current threats to the recovery would have more than a ‘moderating’ impact and promoted the expectation that economic activity was being merely postponed. Tellingly, she called growth factors ‘quite strong over the medium term’ and predicted ‘a continued strong recovery in the medium term.’


  • With respect to the associated question of the December revisions to the staff forecasts, what these would look like was ‘an open question’, she said. In view of her clear assessment of growth prospects, it’s hard to see why she would consider it all that open, and indeed she immediately added that she saw no ‘fundamental change in the growth outlook.’


  • While she might consider the inflation outlook somewhat open, calling it the subject of intense discussion, she didn't spare with specifics that chiefly argued for rather than against high inflation. She noted that ‘quite a few companies expect the supply chain disruptions to last longer than we thought’, even more than a year. On energy, she observed that staff projections were based on futures that were pointing down but might not be ‘reflecting genuine expectations’. She mentioned the ‘important role’ of energy prices in forecasting errors. Moreover, she wondered aloud ‘whether there are certain structural factors that may affect energy price developments going forward’, in particular the green transition. Greater use of carbon pricing would lead to higher energy prices, and supply may not keep up, she said.


  • The stage set, Schnabel got more concrete: ‘I would say the general trends remain intact, which means that, compared with our September projections, I would expect higher inflation numbers going forward, mainly due to the fact that the supply chain disruptions are more persistent than we had initially thought.’ Specifically, 2022 would be revised up, even if a range of factors made it reasonable to expect inflation to decline during the year, she said. It was also plausible that medium-term inflation would fall below 2%, but, she added, ‘the risks to inflation are skewed to the upside’ as the ‘pace and extent of the decline’ have become more uncertain. The ECB would be flying by sight, she suggested, as it was essentially waiting to see whether pre-existing disinflationary forces would reassert themselves and/or whether there were ‘structural shifts pointing in the other direction.’


  • Schnabel called into question the ‘standard prescription’ of not reacting with monetary policy to supply-side shocks, as the persistence of these matters with respect to expectations. Long-term expectations were starting to realign with the ECB’s target, she said. While broad-based second-round effects on wages were not evident, ‘firms expect wages to grow more strongly going forward’, she said. And although there is no sign of expectations de-anchoring to the upside, this is because the ECB would be assumed to react in such a case, she said.


  • Schnabel indicated that the ECB would not delay a policy reaction once its inflation-related conditions for a rate hike were fulfilled. The lags with which policy moves take effect meant that waiting longer would entail ‘a risk that we fall behind the curve’, she said. This is not the case currently, given a medium-term inflation forecast that is not ‘above 2%’, she said. She did not say ‘at 2%’ and also avoided a wording that would have allowed her to say ‘below 2%’.


  • To many asset purchase-related questions she responded by saying that the decision would be made in December. She did however note with regard to the pandemic emergency purchase programme (PEPP) that ‘it's not generally assumed that the entire envelope will be used.’ On an increase in the APP purchase volumes, she gave no reason to think that the answer to the a key related question – stimulus still required for inflation – was positive, citing all the other ways in which the ECB already ‘provides a lot of accommodation’, namely ‘negative rates, forward guidance, the targeted longer-term refinancing operations (TLTROs) and – what I always stress – a very high stock of acquired assets under the APP and the PEPP.’ As for the tools of choice to provide whatever stimulus was deemed correct, here, too, she was unenthusiastic about asset purchases, saying that given diminishing returns and increasing side effects, ‘eventually, there will be a shift from asset purchases towards other tools, most importantly our forward guidance.’

  • Schnabel made clear that she was a fan of the PEPP’s flexibility, the role of which was ‘crucial’. She was unsure about the need to transfer that flexibility to the APP, seeming instead to hint at the possibility of a solution in which the PEPP’s flexibility could suffice even after the end of net purchases. In any case, the ability to deal with fragmentation was important, ‘[e]specially in this transition phase’.