ECB Underestimated Inflation Persistence in March Projections, Schnabel Says

19 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – Inflation is looking stickier than the European Central Bank anticipated in its March projections, Executive Board member Isabel Schnabel said on Friday.

Speaking on a panel at a conference hosted by the London School of Economics, she said she thought that monetary policy transmission could be weaker and take longer than some expect.

‘Inflation surprised again and again on the upside’, she said. ‘So if we just look at the data that came in recently and we compare it with our March projections, we basically underestimated all inflation components except energy.’ The ECB’s ‘main concern’ was therefore ‘persistence of inflation and especially of underlying inflation’, she said.

There were ‘first signs of monetary policy transmission’, though the question now was ‘how this will play out in the real economy.’

‘I think that the lags could be a bit longer because we have longer fixation periods of loans’, she said. Transmission could also ‘be a bit weaker, because the labour market is so strong’, she argued.

‘Supply side factors are fading but the problem is that by now we have seen a certain rotation from supply-side factors to more demand-side factors’, she said.

‘In particular we see that wage-intensive services are playing an increasingly important role’ in driving Eurozone inflation, she said. There was also concern about second-round effects, due to the fact that ‘wage growth has picked up substantially […] we see that unions are pushing for wage increases, so that they can recoup at least part of the lost purchasing power of the employees.’

Furthermore, firms were ‘trying to protect or even increase their margins […] we are seeing that some firms are able to raise prices even more than their costs have risen, supported by a relatively resilient economy and strong demand.’

These wage and price developments were ‘exactly what could set in motion a type of spiral that could worry us’, she said.

Inflation expectations were ‘still anchored’, but were nonetheless ‘stubbornly high’, she said. ‘There are several measures […] they don’t really shift up a lot, but they are above 2%.’

It was therefore important that the ECB ‘show strong determination to bring inflation back to 2%’, she said.

She repeated the ECB’s guidance that ‘from today’s perspective it seems that there’s more that has to be done, as our President says, there’s more ground to cover, so we’ll still have to raise rates more, and stay at a high level probably for quite some time.’