ECB’s Schnabel: Financial Conditions Easing Even With Interest Rates on Hold

23 February 2024

By Isabel Teles – MILAN, Italy (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Friday said that there was evidence showing that financial conditions were already easing in anticipation of an ECB interest rate cut.

Speaking at Bocconi University earlier in the day and then later at the Forum Analysis, both in Milan, Italy, Schnabel said, ‘What is actually quite interesting is even though the policy rate remained constant [since the ECB's last rate hike], the financial conditions have actually come down quite a bit in anticipation of future central bank action.’

‘Market expectations of course matter greatly and so it’s very important to understand that even though we have been keeping rates constant for quite a while, actual financial conditions have already loosened’, she said.

Economic models suggested that the main impact of previous monetary policy tightening had probably passed and that this impact would increasingly fade, which was good news for the economic recovery, she said.

The last mile of the disinflation process was particularly challenging, she argued once again, and demanded attention.

‘Now it’s really about countering the second-round effects, which is a bit tougher, which is more closely related to monetary policy itself and, if you want, this flattening of the path of the projections is consistent with this idea of the last mile of disinflation being more difficult’, she said. ‘Of course, we’re looking very carefully at how our sharp interest rate hikes are transmitted to the financial sector and to the real economy.’

There was evidence that firms were starting to absorb higher costs in their profit margins, she said, adding that this trend was being closely watched, especially in the context of weak economic activity.

Answering questions from the audience, she said the ECB needed to assess all sorts of incoming data to be ‘confident enough that inflation is going to settle at our target over the medium term’, meaning that it was not necessary to see inflation at exactly 2%.

‘But it’s a difficult balancing, we’re trying to do our best by looking at all the data and you can be sure we’re not imposing unnecessary pain in anyone, but we have to fulfill our mandate’, she said.

The path to reduce interest rates was ‘just as complicated as the way up’, she said, and the ECB would continue to follow a meeting-by-meeting approach.