ECB’s Schnabel Cautions Against Adjusting Policy Stance Soon

7 February 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Wednesday emphasised reasons not to change the ECB's monetary policy stance in the near future.

In an interview with the FT, Schnabel said that there was still uncertainty about sticky inflation, which ‘cautions against adjusting the policy stance soon. It means we must be patient and cautious because we know, also from historical experience, that inflation can flare up again.’

The main points of concern during what she called the last mile of disinflation were how firms would react to higher unit labour costs, services inflation, a resilient labour market, markets pricing an early interest rate cut and the fear of supply chain disruptions, she said.

‘I'm not saying that a flare-up in inflation is going to happen’, she said. ‘It’s not my baseline, but I think it's a risk we should be prepared for.’

‘This is an argument against adjusting the policy stance hastily. We have made substantial progress, and that is good news. But we are not there yet’, she warned.

There were ‘signs of monetary policy transmission everywhere’ and the peak of transmission was probably past, she said.

Long-term growth faced challenges in the form of climate change, demographics, geopolitics, globalisation, and digitalisation, she said.

Asked about R-star, she said that the ECB did not know precisely where it was, but the most important aspect was its short-run level, ‘because it is relevant to determine whether our interest rates are restrictive or accommodative.’

‘This 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’, she said. ‘Just as we did over the past year, we need to look at the economy in order to assess how restrictive our policies are.’