ECB Insight: Schnabel – From Saul to Paul?

5 December 2023

By David Barwick – FRANKFURT (Econostream) – It’s about time – that was our first thought on reading European Central Bank Executive Board member Isabel Schnabel’s latest contribution to the public discussion of the monetary policy outlook, in which she confessed to having come around to a less hawkish take on matters.

Not by coincidence, Schnabel deemed it fitting to start the interview Reuters published Tuesday by recalling the John Maynard Keynes quote about changing one’s mind when the facts change.

We think she largely lived up to the promise of that beginning, despite having set the bar rather high with a choice of words that set the stage for a clear break from her previous so reliable hawkishness.

Central bankers being unwilling to admit to fallibility, Schnabel never explicitly admitted that this hawkishness, which culminated in a highly dubious speech by her on November 2, had of late been at odds with the facts on the ground, but what we got was almost as good.

In particular, we would draw attention to her comment today that ‘[t]he most recent inflation number has made a further rate increase rather unlikely.’ One need only contrast that with her comments of just over a month ago, when she insisted that ‘we cannot close the door to further rate hikes.’

Striking now was also how she practically gushed about the latest inflation data. The more-rapid-than-anticipated decline of underlying inflation was ‘quite remarkable’, she said. ‘All in all, inflation developments have been encouraging.’

Rather unaccustomed tones, those, from easily the most hawkish member of the Executive Board.

To be sure, she later reined in her enthusiasm somewhat, citing the need for more progress on underlying inflation, the retreat of which had ‘only recently gained momentum’ and might or might not prove sustained.

But that hardly undoes the crystal-clear rupture today with her earlier stubborn attachment to the idea that another hike might be required. Indeed, the new Schnabel couldn’t even bring herself to exclude a rate cut in the first half of next year, beating a rhetorical retreat when pressed on the issue to the safe neutrality of data-dependence, which she called ‘the main thing' but which, at least nominally, was no less so a month ago.

‘We have to see what’s going to happen’, she said. ‘We have been surprised many times in both directions. So, we should be careful in making statements about something that is going to happen in six months’ time.’

The sudden preference for reticence when it comes to looking half a year down the road is telling, but we find more interesting yet her recognition of surprises of different stripes. This is what had been lacking previously, when it was all about the possibility of upside risks materialising.

Not that the latter mode of thinking was cast aside completely, as seen in Schnabel’s reluctance to endorse market expectations of easing on the grounds that ‘[a]fter more than two years of above-target inflation, we need to err on the side of caution.’

Still, we view her acknowledgment of the potential for things to go in a direction other than that which had previously preoccupied her as significant.

She is, if we are not mistaken, the first hawk to go on the record sounding this dovish about the current outlook for ECB monetary policy.

Given the extent to which other Council hawks seized on her ‘last mile’ speech of a month ago, we suspect her latest comments will encourage those who see things her way to come around themselves. We look forward in particular to seeing whether Bundesbank President Joachim Nagel and Austrian National Bank Governor Robert Holzmann might want to ditch their recent messaging in favour of less strident tones.

If a further rate hike is ‘unlikely’, then the ECB is likely at the terminal rate and the likely next rate move is a cut. Of course, this was the case before Schnabel’s remarks, but leaving aside the dovish extreme of the Governing Council, these facts have been treated lately by monetary authorities as dirty little secrets, lest financial markets get carried away in their easing fantasies.

Schnabel has in effect given markets permission to indulge in their - justified, as we see it - anticipation of a 1H rate cut. It was about time.