ECB’s Schnabel: Can’t Assume that Slower Demand Will Limit Need for Policy Normalisation
30 September 2022
By David Barwick – FRANKFURT (Econostream) – The European Central Bank must continue to hike interest rates, given the likely low levels of medium-term slack in the Eurozone economy, according to ECB Executive Board member Isabel Schnabel on Friday.
In a speech during a panel discussion in Spain, Schnabel said it was ‘unambiguous’ that ‘it would be imprudent for a stability-oriented central bank to chart the future course of interest rates on the assumption that a slowdown in demand will reduce the need for adjusting the monetary policy stance.’
It was ‘unlikely that the euro area economy will operate under much economic slack over the medium term’, she said. ‘On the contrary, if the hit to the supply side is significant, there is even a risk that the output gap turns positive earlier than expected despite weakening demand.’
Current inflation developments confirm that this is possible, she said, noting that core inflation had maintained an upward trend despite months of surveys indicating significantly slower demand.
‘Uncertainty about the persistence of inflation therefore continues to call for a “robust control” approach to monetary policy, which reduces the risks that medium and long-term inflation expectations move further away from our 2% target’, she said. ‘The pivotal role of inflation expectations in driving a potential wage-price spiral reinforces this approach.’
Currently high uncertainty renders forecasting more unreliable and incoming information thus more important, she said, citing European Commission surveys showing a near record-low share of companies whose production was limited by financial constraints.
‘Bank lending to firms even expanded notably in July and August from already elevated levels, and firms continue to add new jobs, suggesting that monetary policy continues to stimulate growth and employment’, she said.
‘Considering these data and the above-target medium-term inflation outlook, further increases in our key policy rates will be needed to ensure that inflation returns to our 2% target in a timely manner’, Schnabel asserted.