ECB’s Schnabel: September ‘Wide Open’, Last Mile ‘Particularly Difficult’

26 July 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Friday said that although inflation was still seen reaching 2% next year, the ‘last mile’ narrative remained valid and September’s monetary policy decision was completely open.

‘We continue to expect inflation to gradually converge to our 2% target over the course of next year’, she said in an interview with German Frankfurter Allgemeine Zeitung. ‘However, persistent services inflation shows that the “last mile” of the fight against inflation is particularly difficult.’

At the time of the June cut, some data were still inconsistent with the ECB’s projections, justifying ongoing vigilance, she said. Since further cuts do not automatically follow an initial easing move, the Council did not change interest rates in July, sees the September decision as ‘wide open’ and in general will not pre-commit to any rate path, she said.

‘The pace of rate cuts will depend on the data’, she said. ‘The same can be said for how far interest rates can be cut overall – this is also uncertain at present.’

Services were playing a central role in the persistence of inflation, she said, and the relationship with wage dynamics meant that inflation could remain high for a long time.

The main question was whether the strong wage growth was driven by the catching-up of real wages or by companies paying more to compensate for labour shortages, she said.

‘In the first case, wage growth can be expected to return to normal once the catch-up process has been completed. In the second, wage growth may well remain high for longer. And this would mean that inflation would also remain high’, she said. ‘We need to monitor this closely.’

It would take time to get a clear picture of the wage situation, she said. Tthe ECB’s projections assumed a moderation in wages and a recovery in productivity with firms willing to absorb labour costs into profit margins, she observed.

It was unlikely for inflation to oscillate much during the last mile, she said.

‘Absent new shocks, I think very strong fluctuations are unlikely at the moment’, she said. ‘Since November last year, inflation rates have hovered around 2.5%. And according to our projections, they will continue to do so over the course of this year, with some ups and downs in the inflation rate, partly owing to statistical base effects in energy prices.’

When the ECB approaches the neutral rate, it would ‘need to be more cautious and assess, on the basis of the data, how restrictive monetary policy is’, she said.

The ECB’s strategy review represented an opportunity to adapt to a new macroeconomic situation, she said.

‘We are no longer in a situation where inflation is persistently too low’, she said. ‘On the contrary, many fear that we could face inflationary supply-side shocks more frequently in the future. We should look at how we can reliably fulfil our price stability mandate in such an environment.’