ECB’s Schnabel: Central Banks Shouldn’t Look at Markets for r*

20 March 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Wednesday said that market pricing should not be the basis of central banks’ assessment of the natural rate of interest, r*.

Speaking at the ECB Watchers Conference, Schnabel said that ‘central banks have little to learn about the natural rate of interest from looking at market pricing, as we may just be looking in the mirror.’

There was evidence that markets' interpretation of central bank communication with respect to r* could have contributed to the recent rise in long-term rates, she said.

‘[S]tudies suggest that the recent rise in real long-term rates may be partly due to financial market participants interpreting the policy tightening, as well as recent central bank communication, as a shift in policymakers’ beliefs about the level of r*.’

Additionally, ‘[i]nvestors’ anticipation of higher private and public investment needs may have put upward pressure on real long-term rates, potentially marking the beginning of yet another protracted period of r* deviating from its long-run trend’, she said.

That meant that the impact of monetary policy actions and communications might have been stronger than presumed, she said, noting that the uncertainty as to how those actions and communications affected real long-term rates required policy makers to be careful.

‘Rather than looking to financial markets, which could just be a mirror of ourselves, we need to thoroughly examine whether the fundamental forces driving the economy over the long run have changed, and communicate these views prudently’, she said.