ECB’s Schnabel: We Need to Stay the Course and Raise Rates Significantly Further

10 February 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank Governing Council member Isabel Schnabel said on Friday that the ECB would carry on with rate hikes and keep rates high until it saw clear signs of easing core inflation.

In a Twitter Q&A, Schnabel, who sits on the ECB Executive Board, said that policymakers ‘need to stay the course and raise rates significantly further’ and ‘cannot yet claim victory in taming inflation’.

‘Rates must reach a sufficiently restrictive level’, she said, adding that ‘we’ll need to keep rates high until we see robust evidence that underlying inflation returns to our target in a timely and durable manner.’

She left open the possibility of a 50bp hike in May, saying that the ECB’s decisions ‘will depend on incoming data and our assessment of the inflation outlook.’

‘We still have ground to cover’, she said.

On the pass-through of monetary policy, she noted that transmission lags of the ECB’s current policy measures were ‘highly uncertain’. The ECB was closely monitoring the impact of monetary tightening, she said, and tighter credit conditions were ‘a first indication that monetary policy is becoming effective.’

The ECB’s last bank lending survey showed ‘early signs that our tighter monetary policy is working’, though tighter credit conditions ‘also seem to be driven by banks’ risk perceptions’, she said.

Despite these initial signs, rate hikes were having ‘little effect’ on inflation so far, she said.

Quantitative tightening was already having an impact on financial markets, she said: ‘The anticipation of balance sheet run-off has already likely contributed to rising bond yields in the euro area.’ Asked how QT would influence inflation, she said she expected ‘the effects of QE and QT to be largely symmetric.’