ECB Insight: Schnabel’s Balancing Act Changes Little to Nothing

29 July 2024

By David Barwick – FRANKFURT (Econostream) – Hawkish though she may seem at first glance, European Central Bank Executive Board member Isabel Schnabel’s interview from Friday changes little to nothing in our view, and it is possible it was never meant to do much more.

The interview with German daily Frankfurter Allgemeine Zeitung, though not published until late on 26 July, was conducted on 22 July, one day before an interview of ECB Vice President Luis de Guindos with Europa Press was published.

The de Guindos interview had however been conducted already on 18 July (even if the ECB, a bit unusually, failed to point this out when publishing it), and thus four days before Schnabel sat down with the FAZ.

We assume that by the time of Schnabel’s interview, she had therefore already had the opportunity to see her colleague’s (then still unpublished) contribution to the public discourse, realised that it would be interpreted dovishly and objected to a few aspects of it.

It is possible that de Guindos’ comments did not influence Schnabel in any direction. It is also feasible that Schnabel wanted to achieve a counterbalance of sorts. If it was the latter, the success of her mission in terms of our thinking about the likelihood of a September rate cut was at least limited.

It is true that Schnabel spends a good portion of her interview harping on ‘last mile’ concerns reflected in the following statements:

• ‘a part of inflation, emanating especially from the services sector, is proving to be particularly persistent’
• ‘the crucial question is whether the recent robust growth in wages is merely driven by a catch-up in real wages … or … because firms have to pay higher wages owing to the shortage of labour’

Schnabel doesn’t propose a tentative answer to the ‘crucial question’, observing merely that it ‘will take quite some time before we can see that clearly’ and that the assumptions of the ECB’s macroeconomic projections, with their more optimistic vision, are ‘not guaranteed’.

Moreover, she notes, goods price inflation, which up to now has tended to mitigate services inflation, cannot be counted on to remain helpful.

Of course, these factors all argue for a go-slow approach to easing monetary policy, and the Governing Council is adhering to one. Nowhere do we read into her comments a clear plea for a ‘go-slower-yet’ approach. She was not sounding the alarm.

For this, what is lacking would be a statement unambiguously calling into question current prospects for the restoration of price stability. This is what it comes down to, and the recycling of a litany of uncertainties to which plenty of attention has already been drawn - and will continue to be - falls short of this standard.

Actually, where Schnabel is most unequivocal is in assuring readers that things are on track, which she does in her very first sentence: ‘We continue to expect inflation to gradually converge to our 2% target over the course of next year.’

And lest anyone think she was subtly saying that inflation would only converge further towards but not necessarily reach the target in 2025, as the current projections foresee, the ECB’s front-page summary of the interview puts paid to such an interpretation: ‘We expect inflation to return to our 2% target by the end of 2025, Executive Board member Isabel Schnabel tells FAZ’, it reads for now.

The fact that the ECB is drawing attention precisely to this aspect of the interview, rather than some more hawkish aspect, could be telling in itself, though we are hesitant to assume that strategic thinking dictates such minutiae.

One might object that Schnabel is only repeating the projections. To that we would respond that she could have declined to do so, or even cast doubt on their validity.

So it is that we come back to de Guindos, for whom the ‘key question’ in the interview with Europa Press was whether the ECB would have ‘more confidence that at the end of 2025 inflation will be at our definition of price stability, which is an inflation rate of 2% over the medium term’.

Schnabel, who in her interview stressed that ‘we do not make our decisions dependent on a single data point’, would probably not endorse the highlighting of one particular data point as the ‘key question’ for the September decision.

Nonetheless, by de Guindos’ standard, which we found refreshingly straightforward, her main message would appear to support the idea of a rate cut at the Governing Council’s next monetary policy meeting. As such, the totality of the interview strikes us as a balancing act meant to highlight the risks while confirming the course.

In any event, Schnabel clearly expects further easing at some point: ‘Once we get closer to the “neutral rate of interest”, where monetary policy is neither expansionary nor restrictive, we need to be more cautious and assess, on the basis of the data, how restrictive monetary policy is’, she said.

Does being ‘more cautious’ later in the process imply being less so at this early stage? In general, why focus on a still-distant phase of easing now, if the timing of the very next step is in doubt?

We are sticking to our view that the ECB is likely to cut rates in September as long as prospects for getting back to 2% inflation do not materially deteriorate compared to June.

There is some risk, limited but non-negligible, that even with this condition met, the ECB will defer its next move out of an abundance of caution. And there is some risk that the condition will not be met and 2% will recede further into the future. Schnabel's latest intervention reminds us of these risks without upsetting our assessment.