ECB’s Schnabel: Restrictive Monetary Policy Appropriate Until Inflation Meets Target

24 November 2023

By Isabel Teles – PORTO, Portugal (Econostream) – European Central Bank Executive Board member Isabel Schnabel late Thursday said that current ECB monetary policy tightness was necessary until there was certainty that inflation would return to 2%.

Speaking at the anniversary dinner of Porto Business School, in Portugal, she said that ‘our current restrictive monetary policy remains appropriate until we can be really confident that inflation returns sustainably to our 2% target. And this is of course our main objective, to bring inflation back to our 2% target.’

What she called the ‘last mile’ of the disinflationary would be harder and slower both for overall and core inflation. ‘It took us around one year to get from 10.6% to 2.9%, but our projections say it’s going to take us two more years to get from 2.9% to 2%’, she said.

‘One reason for the slowdown in the disinflation process is the very unusual situation of the labour markets’, she said. ‘What now really matters for what is going to happen to inflation going forward is going to depend on how firms respond to this increase in their wage costs.’

There was uncertainty regarding the strength and length of monetary policy transmission, she said.

New risks, especially regarding energy, were not ruled out and could interfere with the return of inflation to 2%, which was one of the reasons why ‘we should not count on the disinflationary process to continue at the speed that we’ve seen over the past year’, she argued.

‘If we think about future inflation developments, they will also rely on whether the euro area may experience new supply side shocks’, she said. ‘So we’ve seen all these supply side shocks over the past years and it may be naïve to assume that no new shocks could arise.’

A key measure of success of the ECB’s monetary policy was the ability to ‘remain credible in our promise to bring inflation back to 2% as quickly as possible’, she said.

‘And what we call the anchoring of inflation expectations is crucial, because if you think about it, if people believe us, if business and household believe us that inflation is going to come back to 2%, this will have an impact on rate setting behaviour, in price setting behaviour and this helps us in the end  to bring inflation down to 2%’, she said.

However, inflation expectations should not be taken as a given, but rather, their fragility required that they be closely monitored, she said.

It was not the moment to declare victory over inflation, she said, since there were still risks to prospects of inflation coming down to 2% by 2025.

‘[M]onetary policy needs to be perseverant and needs to be vigilant to see if there are signs in the economy that give us reasons to believe that we need to move away from our baseline’, she said.