ECB Insight: Schnabel Becomes Latest Council Member to Temper Her Hawkish Language
7 June 2023
By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel, who had been keeping her policy views relatively under wraps, was bound to air these before the 15 June Governing Council meeting, and did so on Wednesday, just before the start of the quiet period, with comments we see as fitting the general trend toward a more dovish outlook.
Asked in an interview with Belgian business daily de Tijd whether market expectations of two more 25bp rate hikes were realistic, Schnabel was not only disinclined to answer in the affirmative (‘It will depend on the incoming data’), but was not even willing to indicate that she saw such an outcome as likely or necessary.
Instead, she reiterated that an end to the hiking cycle would require not merely a peak in underlying inflation, but rather, ‘convincing evidence that inflation returns to our 2% target in a sustained and timely manner’, and she declared that ‘[w]e are not at that point yet.’
How much is that really worth? Little, we think. It’s not hard to insist on the need for ‘convincing evidence’, given that the obviousness of such a standard means that no one was ever expecting her to say that a ‘decent chance’ or even a more exacting ‘reasonable expectation’ would be enough to call it quits.
A bit like De Nederlandsche Bank Governor Klaas Knot’s call yesterday for rate hikes to continue ‘until we see inflation return to our 2% target over the medium term’, Schnabel is hardly going out on any limb by essentially saying that the ECB will fulfil its price stability mandate and avoiding clarity about what she thinks this will require.
Contending that ‘[w]e are not at that point yet’ or her subsequent remark that ‘[w]e have more ground to cover’ doesn’t compensate for the timidity of her previous words. On the contrary, it underscores the lack of boldness, inasmuch as it confirms the impression that she is unwilling to commit the ECB even on a tentative basis simply to what the markets already expect.
We note of course that Schnabel maintained that ‘the costs of doing too little continue to be greater than the costs of doing too much.’ With 25bp coming at least in June and probably in July (even if she was loath to confirm it), and with even some Council doves apparently on board with another hike, this must be so.
More interesting in any event is the fact that she prefaced the comment with the assurance that ‘we try to balance the risks of doing too little against the risks of doing too much.’
We believe this is new from her and indeed from any member of the Executive Board. It is in any event so that ECB President Christine Lagarde didn’t acknowledge the need to worry about this at the last press conference – contrary to our speculation on the eve of the occasion – or since.
As such, this little observation from Schnabel reinforces our view that the ECB is in the process of preparing for the beginning of the end, or at least for the next phase of the cycle.