ECB’s Schnabel: ‘Must Be Cautious Not to Adjust Our Policy Stance Prematurely’

16 February 2024

By David Barwick – FRANKFURT (Econostream) – The European Central Bank has to be sure that it does not initiate policy easing too soon, given ongoing threats to price stability, ECB Executive Board member Isabel Schnabel said Friday.

In a speech at the European University Institute in Florence, Italy, Schnabel, according to a text provided by the ECB, said, ‘Over the past year, we have made considerable progress in restoring price stability after the largest inflationary shock in decades.’

However, low and even negative productivity growth added to the increase in unit labour costs from wage growth, she said. This ‘increases the risk that firms may pass higher wage costs on to consumers, which could delay inflation returning to our 2% target’, she warned.

Monetary policy must therefore remain restrictive until authorities can be certain of the sustainable restoration of price stability, she said.

‘The recent long period of high inflation suggests that, to avoid being forced into adopting a stop-and-go policy akin to that of the 1970s, we must be cautious not to adjust our policy stance prematurely’, she said.

Schnabel noted that productivity growth was ‘a key determinant of medium-term inflation and real interest rates, which means it directly affects the conduct of monetary policy.’ Anything that raised productivity growth helped monetary policy achieve price stability, she said.

This would be valuable in the event of new disinflationary shocks, she said, since higher productivity growth effectively raised r*. According to Schnabel, there were estimates showing that if trend productivity growth rose by one percentage point, then r* would increase by 0.6 percentage point.

‘A higher r* would reduce the need to embark on unconventional policy measures that often come with larger side effects’, she said.