Rate Hikes Not Yet Clearly Showing Enough Impact on Inflation, ECB’s Schnabel Says

7 February 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel questioned on Tuesday whether the impact of monetary policy tightening to date would return euro area inflation to 2%.

In a webinar for German think tank Finanzwende, Schnabel said that ‘it is not yet clear that monetary policy is really having such an impact that we can hope that inflation will come back to our inflation target of 2% in the medium term.’

The recent fall in headline inflation ‘has nothing to do yet with the tightening of monetary policy’, she said. ‘The decline was driven by the energy component […] due to the sharp fall in energy price inflation’, with base effects also playing an increasing role.

‘We cannot give the all-clear’ on inflation, she warned. She said that policymakers are particularly concerned that ‘underlying inflation is still at an extraordinarily high level.’

Furthermore, she saw the momentum of inflation remaining high, especially in the services sector.

She repeated the ECB’s guidance from its last monetary policy meeting, saying that ‘we intend to raise the key interest rates by 50bp in March as well.’

On government energy subsidies, she said that ‘fiscal policy is extraordinarily expansionary at the moment’, whilst measures to tackle the energy crisis have so far ‘been largely untargeted.’

‘We assume that this massive, untargeted fiscal policy will have an inflationary effect in the medium term’, she said.

The labour market has ‘proven to be exceptionally resilient’, and there are ‘labour shortages across the euro area’, she said.