ECB’s Schnabel: ‘Interest Rates Will Still Have to Rise Significantly’
10 January 2023
By David Barwick – FRANKFURT (Econostream) – The European Central Bank must still hike official borrowing costs significantly and into restrictive territory, according to ECB Executive Board member Isabel Schnabel on Tuesday.
In a speech at a symposium of Sweden's Riksbank, Schnabel said, ‘We judge that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target.’
Even if tighter monetary policy would make the green transition more expensive and thus risk delaying it, she said, ‘tighter financing conditions are the appropriate response to the challenges we are facing today.’
One reason is that decarbonisation requires price stability, inasmuch as high inflation rates are effectively a tax on investment, she said.
Moreover, current inflation won’t go away without policy action, she argued. ‘What started as a relative price shock has gradually morphed into a broad-based increase in the general price level’, she said. ‘Preliminary inflation data for December point to a persistent build-up of underlying price pressures even as energy price inflation has started to subside from uncomfortably high levels.’
This implies a need for restrictive financing conditions to dampen demand and thus price pressures, she said.
‘Third, the experience of the 1970s shows that a policy that is falsely calibrated on the assumption that inflation will decline by itself could ultimately put the green transition more fundamentally at risk’, Schnabel continued.
Such an assumption would eventually require tightening policy to such a degree as to prohibit investment, she said.
‘Our current policy is calibrated to avoid such very bad outcomes’, she said. ‘A determined reaction to the risk that inflation may become entrenched not only safeguards price stability but also provides the conditions under which the green transition can thrive sustainably.’