ECB Insight: Schnabel Ready to Hike in July After Ending Net Asset Purchases in June
4 May 2022
By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Tuesday presented a strong case for taking policy action relatively soon, suggesting in particular that net asset purchases could end in June with a first rate hike the following month.
In an interview with German business daily Handelsblatt, Schnabel said that ‘inflationary pressures are becoming more broad-based’ and rejected the argument that no wage-price spiral was currently visible, asserting that ‘the data are backward-looking and we need to pursue a forward-looking monetary policy’.
‘So we can’t afford to wait until a wage-price spiral has already set in before responding’, she said. ‘There can be no doubt that we will see higher wage demands if inflation remains so high over a prolonged period. We need to prevent high inflation from becoming entrenched in expectations. Talking is no longer enough, we need to act.’
Whilst the data will ultimately decide, she said, at the moment it appears that the ECB would be able to end net asset purchases under the asset purchase programme ‘at the end of June’, she said. That is the first time an Executive Board member has raised the possibility of a June end to net purchases, the ECB having spoken for some months of a 3Q end.
However, as Econostream readers may recall, we have consistently pointed out since March 11 the possibility of an earlier end, arguing on April 26 that a June end in any event was not ‘indefensibly inconsistent with the ECB’s stated intention of ending net purchases in 3Q, as the end could be defined as that month - or other period - in which such purchases reach and remain at zero.’
Naturally, we see Schnabel’s comment as raising the odds that June will be the final month of net asset purchases, though – as she herself noted – another outcome, depending on data, is also not ruled out.
‘From today’s perspective, a rate increase in July is possible in my view’, Schnabel went on, again noting that incoming data would have to settle the question in the end. A growing number of Governing Council members are thus clearly ready for rates lift-off as soon as July, which makes sense.
As we argued on April 26: ‘Assuming data continue to be consistent with not deferring unduly a normalisation of policy, then clearing the way for a July 21 rate hike seems more prudent than the alternative of waiting all the way to September 8, at least if the ECB wishes to appear serious about heading inflation risks off at the pass.’
That it is indeed about acting pre-emptively is clear, based on Schnabel’s comments about needing to pursue a forward-looking monetary policy and prevent an otherwise potentially inevitable wage-price spiral.
And, given the ECB’s commitment regarding sequencing – which Schnabel took the opportunity to reiterate – the July rate hike in turn calls for also argues for ending net asset purchases in June, though it is worth noting here that the ECB is willing to interpret ‘some time after’ to indicate a time lapse of arbitrarily short duration.
Schnabel indicated that the path of interest rate hikes would be determined as the ECB went and was not foreordained, though she hinted at room for multiple increases. In particular, she said, ‘[w]e are still quite far off from a neutral interest rate’, which ‘some estimates show … is well on the positive side.’
Schnabel was asked whether the ECB would take the same cautious steps of the recent past when adjusting rates or whether 0.25-basis-point moves were more likely. Here, she responded that the caution applied when taking rates below zero ‘does not apply when moving in the opposite direction.’
Regrettably, this line was not pursued. At a minimum, she meant that expectations of the same 0.5- and 0.10-bps moves to which the ECB has limited itself since 2014 were not warranted. It cannot necessarily be gleaned from the remark whether she wished to open the door to an outsized rate hike of 50 bps, however.
To Econostream, Schnabel’s comments on how the ECB would handle market tensions arising from higher borrowing costs were somewhat suggestive of an inability thus far to arrive at a satisfactory conclusion with respect to a permanent programme specifically meant to keep spreads in check.
‘We will decisively counter any sudden jumps in yields that have no fundamental justification’, she said. ‘We will prevent euro area fragmentation driven by speculation. We already have a programme available for this as we can flexibly reinvest maturing securities under the PEPP.’
Econostream recently expressed doubts about the ECB’s ability to come up easily with an anti-spreads programme, and Schnabel now ducked a question explicitly about how one might look, referring instead to the ECB’s demonstrated capacity for action when needed.
Quantitative tightening was not yet up for discussion, she said; indeed, it would surely spook financial markets, were QT to already be on the agenda, and Lagarde already said on April 14 that it was not.