ECB’s Schnabel: Whether Two More 25BP Hikes Are Realistic ‘Will Depend on the Incoming Data’

7 June 2023

By David Barwick – FRANKFURT (Econostream) – Whether the European Central Bank will hike interest rates by 25bp in June and July hinges on information yet to become available, according to ECB Executive Board member Isabel Schnabel on Wednesday.

In an interview with Belgian business daily De Tijd, Schnabel, said that whether market expectations of two more 25bp rate hikes are realistic ‘will depend on the incoming data. Let me be very clear: A peak in underlying inflation would not be sufficient to declare victory: we need to see convincing evidence that inflation returns to our 2% target in a sustained and timely manner. We are not at that point yet.’

Faced with high uncertainty, the ECB seeks ‘to balance the risks of doing too little against the risks of doing too much’, she said. At the moment, the former still exceed the latter, she said.

‘The reason is that once inflation has become entrenched in the economy, it becomes much more costly to fight it’, she said. ‘We have more ground to cover. It will depend on the incoming data by how much more rates will have to increase.’

Although headline inflation had descended ‘relatively quickly’, underlying inflation was stubbornly elevated, she said. Price pressures from food would decline, she predicted.

Given the extended period of above-target inflation, keeping expectations anchored was critical, she said.

‘Staff analysis suggests that monetary policy transmission is proceeding and that the impact of our tighter monetary policy on inflation is expected to peak in 2024’, she said. ‘However, there is great uncertainty over the strength and the speed of this process.’

A recession was not currently foreseen, she said, though the ECB ‘cannot be sure that it will really work out that way.’

Schnabel accused fiscal policy of adding to price pressures, and reminded that governments should try to enhance the productivity of their economies.

‘That would help dampen inflation’, she said. ‘But that is not what is happening in most countries.’