ECB’s Schnabel: ‘On the Right Path to Achieving our Target in a More Sustainable Manner’

22 December 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank is headed in the right direction in terms of sustainably achieving price stability, Executive Board member Isabel Schnabel said Wednesday.

In an interview with French daily Le Monde, Schnabel called last week’s decision by the Governing Council ‘an important step towards the normalisation of our monetary policy.’

The process had to be gradual lest the recovery be throttled by rapidly tightened financing conditions, she said. ‘We are taking a step-by-step approach to normalisation, the pace of which can be adjusted to the incoming data’, she said. ‘We need to retain optionality to make sure that we sustainably reach our 2% target.’

In past years, ‘stubbornly low’ inflation made it hard to achieve price stability, she said. ‘Over the past year, however, we have made substantial progress, and it seems we are on the right path to achieving our target in a more sustainable manner. This is a precondition for policy normalisation.’

Schnabel said she hoped to see a more normal monetary policy before her mandate ended in 2028. ‘The developments over the past year give reason for cautious optimism’, she said. In contrast to the low growth and inflation characterising the pre-pandemic environment, ‘now we are seeing that inflation is picking up and inflation expectations are realigning with our target of 2%’, she said.

Pandemic-related ‘headwinds in the short term’ meant a ‘weaker fourth quarter and this is likely to spill over to the beginning of next year’, she said.

‘However, we expect a stronger rebound thereafter, so activity essentially shifts over time’, she continued. ‘This has been a recurring pattern during the pandemic. Households in the euro area have accumulated considerable savings, which supports the recovery. Hence, we see the recovery as being delayed rather than derailed.’

High inflation is due to factors that are very specific to the pandemic and all ‘likely to either reverse or at least become less pronounced over the coming year’, she said. Supply constraints had to be resolved eventually, energy prices had to decelerate and base effects would fade out, she argued.

‘We know that inflation is going to be elevated for a certain period of time, but also that it’s going to decline over the course of next year’, she said. ‘We are less certain about how fast and how strong the decline will be.’

In view of forecasters’ failure to predict inflation’s strength, the ECB was relying more heavily on company and household surveys, she said. Some participating companies saw supply constraints into 2023 and expected wages to accelerate, she said.

‘We are well aware of the uncertainty around our inflation projections’, she said. ‘There is a risk to the upside.’

The ECB’s projections were based on ‘the best economic models available’, she said, adding however that ‘everybody agrees that uncertainty is unusually high.’

A difficult question not necessarily reflected in forecasting models was whether economies would return to the pre-pandemic environment of low inflation or enter a new world of higher price pressures, she said. The green transition was reason to think the latter, she indicated, but the answer ‘remains to be seen.’

‘We should follow a risk management approach so that we can quickly respond should we see signs that inflation will stay more permanently at a level above our 2% target’, she said.

Schnabel reiterated the view that the ratio of costs to benefits of asset purchases mounts as economic conditions improve. ‘This is why we slow down purchases now’, she said. ‘But given the prevailing uncertainties, this has to be gradual, also with a view to ensuring the smooth transmission of our policy across the entire euro area.’