ECB Insight: Schnabel Upgrades the Risk Outlook, Advocates Being Pre-Emptive

16 February 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel’s latest comments suggest that the ECB has become more serious yet about heading inflation risks off at the pass and raise the stakes for the March Governing Council meeting.

In an interview with the Financial Times, Schnabel admitted – as virtually all Council members have – that there is no wage-price spiral in sight, but also suggested that this per se was no justification for inaction and that the ECB had to ‘make sure that a wage-price spiral does not arise.’

That, she said, meant that ‘we cannot simply look through everything, especially if inflation now becomes more broad-based and more persistent than we originally thought.’

Schnabel was not for the first time rejecting complacently looking through supply-side factors over which monetary policy holds no sway. Already on January 8, she said that monetary policy ‘cannot afford to look through energy price increases if they pose a risk to medium-term price stability.’

However, she is clearly yet less inclined now simply to hope that developments prove transient, affirming that upside inflation surprises the last two months required ‘a reassessment of the inflation outlook’ and warning that inflation might not be back under 2% even at the end of 2022.

This is an upgrade of the risk outlook and a foretaste of the staff macroeconomic projections now being updated. Previously, the ECB had stuck doggedly to the somewhat non-committal assessment, uttered again by President Christine Lagarde only on Monday, that ‘[w]hile the outlook for inflation is uncertain, it is likely to remain elevated for longer than previously expected, but to decline in the course of this year.’

Schnabel had yet other reasons to see the inflation outlook in a new light, and all of them amounted to upside factors: the relative mildness of Omicron’s economic impact, strong labour markets and pipeline pressure, in which context she said that the pass-through of robust producer price inflation ‘can be expected to be stronger than usually.’

It is thus more likely that the ECB would see its price stability goal achieved, so that a gradual policy normalisation is called for, she said. But while recognising that there was also a risk of acting too early, Schnabel seemed to see the greater threat from an overly casual approach to normalisation.

‘With the most recent data, however, the risk of acting too late has increased and therefore we need a careful reassessment of the inflation outlook’, she said.

The fulfilment of the ECB’s conditions for lift-off, she made abundantly clear, by no means had to be seen only in the rear-view mirror for monetary policy to tighten, implicitly suggesting that the March 10 meeting of the Governing Council would bring a decision to reduce asset purchases.

‘In March, we are going to look at the data that have come in as well as the new projections and then the Governing Council is going to evaluate the progress we have made in meeting the conditions of our rate forward guidance’, she said. ‘And when we judge that the probability of meeting the conditions is sufficiently high, we will consider adjustments to the pace of our asset purchases, reflecting our sequencing. This implies that we will end our net asset purchases before the conditions of our forward guidance are fulfilled.’

Schnabel is well known as the most hawkish member of the Executive Board. Indeed, she is perhaps the only member who comes close to warranting being characterised as hawkish. However, she is also a good soldier, and if anything thus probably expresses herself understatedly so as to avoid the appearance of criticising her institution.

We can readily imagine though that she is not alone in the Eurotower - let alone among the national central banks - with her growing concern about the need for policy to become more pre-emptive, and suspect on the basis of her newest remarks that a hawkish outcome in three weeks is in the offing.