ECB’s Schnabel: ‘Policy Should Proceed Gradually and Cautiously’

30 August 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Friday said that incoming data were consistent with restoring price stability in a timely manner, but that it was still necessary to remain cautious when considering cutting interest rates.

During a lecture at Eesti Pank in Tallinn, the text of which was posted to the website of the ECB, Schnabel said, ‘Given that the path back to price stability hinges on a set of critical assumptions, policy should proceed gradually and cautiously.’

The pace of monetary policy easing could not be mechanical, she said. ‘It needs to rest on data and analysis’, she said.

On the one hand, the ECB’s confidence in converging to the 2% inflation target by the end of 2025 had been bolstered by incoming data, which ‘broadly confirmed the baseline outlook’, she said.

On the other, the future was still uncertain, and actual developments might not conform to what models had anticipated, reason for which it was necessary to conduct frequent scenario analyses, she said.

Giving too much weight to backward-looking data could lead to adjusting monetary policy too slowly, she warned.

‘But the earlier monetary policy shifts in response to forward-looking signals, the more cautious and gradual it can afford to be on the way back to (an unknown) neutral’, she said.

In that context, economic projections remained key for the decision-making process, she said.

A soft landing in the euro area was still more likely than a recession, she said.

‘All in all, recent data remain consistent with the baseline scenario that foresees that inflation will sustainably fall back to our 2% target by the end of 2025’, she said. ‘Along with signs of a potential decline in economic momentum in other parts of the world, there is less risk that a further moderate and gradual dialling back of policy restraint could derail the path back to price stability.’