ECB’s Schnabel: End of Net PEPP Purchases First Step Towards Hiking Interest Rates

14 January 2022

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s decision last month to end net pandemic emergency purchase programme (PEPP) purchases was an initial step in the direction of higher interest rates, ECB Executive Board member Isabel Schnabel said Friday.

In an interview with German daily Süddeutsche Zeitung, Schnabel said that the forecast of medium-term inflation below 2% was surrounded by high uncertainty, but that raising borrowing costs now would be too soon and risk harming the economic recovery.

‘In our projections, medium-term inflation will even fall back below our target of 2%, even though we acknowledge that the projections are now subject to great uncertainty’, she said. ‘That is why we should not raise interest rates prematurely, as that could potentially choke off the recovery.’

‘But we will act quickly and decisively if we conclude that inflation may settle above 2%’, she added. ‘A precondition for raising interest rates is to end net asset purchases; and our December decision is a first step in this direction.’

The latest euro area inflation data was seen by the ECB ‘with some concern, as they are higher than we initially expected’, she said. However, the ‘two-year rate of inflation’ to December was only 2.5%, she noted.

Schnabel rejected the idea that the ECB’s stubborn refusal to tighten policy was meant to protect heavily indebted euro area member countries. The ECB was focused exclusively on price stability, she insisted.

‘How financial markets will respond to the exit from our expansionary monetary policy measures is obviously an aspect that we need to consider because it affects the financing conditions for households and firms’, she said. ‘But that is an entirely different matter to keeping interest rates low purely to help certain countries repay their debt.’

New Bundesbank President Joachim Nagel was ‘a good choice – and I’m really happy here at the ECB’, she said when asked whether a woman should have been chosen for the job. Still, she also noted that ‘[t]he German government could have contributed to increasing’ the share of female monetary policymakers.