ECB’s Schnabel: Expect Rate Hike in October, But Size Still Open; Inflation Expectations Concerning

22 September 2022

By David Barwick – FRANKFURT (Econostream) – It is not clear by how much the European Central Bank will hike interest rates next month, or where the terminal rate will lie, but there is concern about a drift in inflation expectations, according to ECB Executive Board member Isabel Schnabel on Thursday.

In an interview with German news portal t-online, Schnabel, asked about the outcome of the October 27 meeting, replied, ‘I’m expecting that the ECB’s Governing Council will continue to increase interest rates at its next meeting. What I cannot say is how big this hike will be or at what level we will stop increasing rates. We are deciding meeting by meeting, based on an assessment of all the economic and inflation data.’

Inflation expectations were ‘crucial’ to monetary policy decisions, she said. ‘We see with some concern that more people expect inflation to exceed our 2% target also in the medium term’, she said. ‘This makes it all the more important to send clear signals that people can rely on the ECB and that inflation will go down again.’

Inflation could accelerate further in the near term, she said, being mainly the product of things the ECB has no direct control over. However, she said with a view to the rapidly progressing normalisation of monetary policy, ‘we are on the right track.’

‘In early September we even hiked rates by 0.75 percentage points’, she said. ‘This sent out an important signal: We are doing whatever is needed to bring inflation back to our 2% target.’

The process of normalisation would not be deterred by an economic slowdown, she made clear.

‘A looming downturn would have a dampening effect on inflation’, she said. ‘Of course, we take this into account when calibrating our monetary policy. However, the starting point of interest rates is very low, so it is clear that we need to continue raising rates.’

The ECB sees ‘no signs’ of a wage-price spiral emerging, she said, but this is something the ECB is ‘closely monitoring’.

‘So far, wage agreements are nowhere near keeping pace with inflation’, she said. ‘Price-adjusted wages are falling, meaning that purchasing power is declining.’