ECB’s Schnabel: Inflation Higher and Economy Stronger Than Projected, But Lending to Slow Further
24 April 2023
By Xavier D’Arcy and David Barwick – FRANKFURT (Econostream) – The European Central Bank’s May policy decision will depend on data now showing inflation to be higher and the economy stronger than expected, but also likely to confirm a further slowdown of lending, according to ECB Executive Board member Isabel Schnabel on Monday.
In an interview with Politico, Schnabel said that with headline inflation rapidly subsiding but core measures exhibiting ‘very strong momentum’, it was ‘far too early to declare victory on inflation.’
That core inflation might or might not peak was not necessarily the issue per se, ‘because what really matters is that inflation is returning to our 2% target over the medium term’, she said. ‘We need to see a sustained decline in core inflation that gives us confidence that our measures are starting to work.’
As for the May monetary policy decision, this would be ‘strictly data dependent’, she reminded. ‘The data we have so far shows that inflation is higher and the economy more resilient than projected.’
‘But we're also seeing first signs of transmission of our interest rate hikes’, she continued. Lending, already slowing, would probably weaken further amid uncertainty related to banking sector volatility, she said.
‘This certainly needs to be taken into account when assessing the transmission of the measures that we have already taken’, she said.
‘So I would say it's clear that further rate hikes are needed, but the size of the rate hikes is going to depend on the incoming data’, she said. The option of a 50bp hike was ‘not off the table’, she confirmed when asked.
According to Schnabel, core inflation would reach its maximum ‘over the coming months, but it’s not clear that that is going to happen very soon.’ This however was but ‘a single data point’, and core could still stay persistently high, reducing the informational value of the peak, she said.
‘So what we really need is confidence that it's actually coming down in a sustained manner’, she said.
The terminal rate could not be stated in advance, given the data-dependent nature of policymaking, she said. ‘I'm comfortable with the view that further rate hikes are needed’, she said. ‘And beyond that, I'm not going to make any further predictions.’
There was currently ‘no reason’ to expect a recession in the euro area, she said, though she left open the possibility of banking sector turmoil altering this view.
Financial markets were absorbing additional debt in the context of the ECB’s reduction of its balance sheet ‘very smoothly’, she said, suggesting that the ECB would ‘continue to be predictable.’
There had been no discussion yet of changing the guidance applicable to reinvestment of securities purchased under the pandemic emergency purchase programme (PEPP), she said.
Work had already started on deciding whether the ‘steady state’ balance sheet of the ECB would be large or small, and would hopefully be concluded by the end of the year, she said. ‘It's well conceivable that in the steady state we will continue to have a structural bond portfolio, but that it is going to be much smaller than what we have now’, she said.
Geopolitical fragmentation highlighted by ECB President Christine Lagarde in a recent speech was a ‘longer-term development’ that did not pose a threat to price stability in the short term, Schnabel said. ‘In the short run, the recovery in China has a direct impact on our projections, although I don’t expect it to fundamentally change the inflation outlook.’