ECB Insight: Schnabel Pushes Back Against Market Pricing, but Carefully, Slamming No Doors

7 February 2024

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel in her latest comments managed to convey the impression that she did not envision the first ECB rate cut coming too soon whilst skirting the mention of any calendar month or particular timing.


Importantly, she conveyed the message in such a way as not to slam any doors shut, highlighting the uncertainty as to what the correct choice will be when the time comes and the potentially difficult struggle on the Governing Council if the answer is ambiguous.


In an interview with the Financial Times, Schnabel set the stage by characterising the current stage of monetary policy as ‘a critical phase where … it is all about containing the second-round effects’ and by resuscitating the – apparently only temporarily retired - narrative of the treacherous ‘last mile’.


There was no sign of her ‘changed facts’ attitude of the interview she gave two months ago. The decisive question now was whether businesses were in a position to saddle consumers with ‘historically high’ unit labour cost growth, she said.


Whilst conceding some signs of firms swallowing these costs, she cast doubt on whether such a trend could be relied on, noting that a stronger economy would favour greater pass-through and that service sector expectations of selling prices had been rising.


All in all, the evidence ‘cautions against adjusting the policy stance soon’, she concluded. ‘It means we must be patient and cautious because we know, also from historical experience, that inflation can flare up again.’


Schnabel cited recent IMF research showing that such an inflationary flare-up could occur ‘several years after the initial shock’. As she went on from there to suggest that the euro area could be on the verge of an economic ‘turnaround’, we find it hard to imagine that she would be amenable to easing as soon as April.


And yet, Schnabel specified no single month, even indirectly, and did not explicitly criticise market expectations. Neither the transcript of the interview provided by the ECB nor that published in the FT indicates that anyone asked the ‘when’ question; a direct confrontation with the issue seems to have been so thoroughly avoided that she didn’t even need the escape hatch of data-dependence.


We don’t believe that the FT forgot or considered it unnecessary to raise this point. Rather, we see the omission as in line with the ECB’s view of rate cut talk as ‘premature’ and the best way of leaving all options open when there is high uncertainty about what developments will allow and when.


In any case, Schnabel implicitly acknowledged that policy easing was coming with an interesting comment somewhat hidden in a part of the interview focussing on R-star.


Ignorance as to the precise level of short-run R-star ‘implies that, once we start to cut rates – and as I said, we're not there yet – we must proceed cautiously in small steps’, she said. ‘We may even need to pause on the way down if inflation proves sticky and the data does not give a clear picture about how restrictive our monetary policy is.’


We are struck by the juxtaposition of her diverse warnings around premature rate cuts with her readiness to contemplate the pace at which the loosening of the monetary reins will proceed. A more convincing rejection of imminent easing would probably not be followed by musings about how to do it.


We can’t help but think when we see her introducing the idea of pausing ‘on the way down’ that this is an ‘out’ of sorts that would allow a certain amount of leeway when it comes to the starting date, making it even less of an accident that Schnabel never explicitly took April off the table.