ECB Insight: Schnabel Comments Boost Odds of 75bp Rate Hike in October
22 September 2022
By David Barwick – FRANKFURT (Econostream) – Comments by European Central Bank Executive Board member Isabel Schnabel published on Thursday appear to increase the likelihood that the ECB will opt for another 75bp hike next month, which would make for its second outsize rate step in a row.
In an interview with a German online news portal, Schnabel confirmed with respect to the October 27 monetary policy meeting that a hike was the likely outcome. She naturally declined to be precise about its magnitude, and for good measure added that the terminal rate was also not known.
‘We are deciding meeting by meeting, based on an assessment of all the economic and inflation data’, she said, dutifully reiterating the ECB’s latest mantra.
Her circumspect approach to the topic notwithstanding, various other comments in the course of the interview suggested that she would be amenable to going big yet again.
For one thing, she provided an overarching context that would be consistent with a relatively large hike by making clear that the ECB’s efforts to date hadn’t made rapid price growth any less persistent.
On the contrary, inflation would stay elevated ‘[p]robably a while still’ and indeed ‘may continue growing in the short term, despite the recent interest rate hikes’, she said.
Schnabel also explicitly praised the Governing Council’s decision earlier this month, when policymakers ‘even hiked rates by 0.75 percentage points.’
‘This sent out an important signal’, she said. ‘We are doing whatever is needed to bring inflation back to our 2% target.’
Unless one thinks that an ‘important signal’ about the seriousness of ECB intentions will no longer be called for five weeks from today - something Schnabel gave zero reason to assume - then a hike of the same magnitude would seem legitimate.
Certainly the ECB will want to be seen as continuing to do, in her words, ‘whatever is needed’ to safeguard price stability.
We don’t know whether Schnabel actually intended with these comments to send a subtle signal in favour of 75bp on October 27, but consider them to amount to as much.
Moreover, she delivered the best possible reason for the ECB to do anything but let up yet. ‘Inflation expectations play a crucial role in our decisions’, she said. ‘We see with some concern that more people expect inflation to exceed our 2% target also in the medium term.’
With nearly every European central banker across the hawk-dove spectrum putting emphasis in recent weeks on the importance of keeping expectations anchored, such a comment doesn’t seem in line with any relaxation of the ECB’s approach to normalisation.
As Schnabel herself promptly added with reference to the apparent drift of expectations: ‘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.’
Again, ‘clear signals’ are unlikely to become less appropriate in the near term, so that the comment supports another substantial increase in interest rates.
And while the deterioration of growth prospects is likely to become more evident between now and October 27, Schnabel left no doubt that an economic slowdown would not per se stay the ECB’s hand.
‘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.’
At this still relatively early stage, with 36 days until the next interest rate decision, we don’t claim that 75bp is a done deal by any means. However, by our reading, Schnabel’s comments lean clearly in the direction of the larger alternative to 50bp, and we assume these are the relevant choices.
Indeed, the apparent tilt strikes us all the more strongly precisely in view of how soon her remarks follow on the last meeting: one week, given that the interview, though published today, was conducted on September 15.