Isabel Schnabel, a member of the European Central Bank’s (ECB) Executive Board, has mentioned that the euro area’s economic outlook is worse than anticipated back in June. She also noted that underlying inflation continues to be persistently elevated. Underlining the difficulty that the present economic situation presents to policymakers, the individual responsible for overseeing markets refrained from pledging any particular actions in September and remarked that it is currently uncertain whether borrowing expenses must be further increased.
ECB’s high underlying inflation ensues
Recent developments have led Schnabel, a prominent figure at the ECB, to state that growth prospects are dimmer than initially anticipated. She pointed out that the persistent issue of high underlying inflation remains despite this. This observation underscores policymakers’ challenge as they approach a crucial decision – whether to continue raising interest rates for the tenth time in a row or to pause and allow their tightening measures to take effect.
The upcoming ECB meeting in two weeks is pivotal, with the recently released data starting to shape their discussions. These numbers indicated that price increases slowed down less than expected in Germany, while they picked up pace in France and Spain. Later data on Thursday for the Eurozone could confirm that underlying inflation remains above 5%.
Schnabel, noted for her more firm stance during this tightening phase, emphasized that maintaining higher interest rates is necessary to control consumer prices, even as the ECB’s clarity on the situation becomes less certain. She explained that if current policies aren’t helping inflation return to the 2% target on time, it would be reasonable to consider further rate increases. Alternatively, if their assessment shows that the effects of their monetary policy are progressing as intended, they might wait until the next meeting to gather more evidence.
In either scenario, Schnabel indicated that a tighter monetary approach would continue. Further, she explained that maintaining a sufficiently restrictive monetary policy is vital to ensure that inflation returns to their 2% target within an appropriate time frame. However, she said, they cannot predict the exact peak rate or how long they must keep rates at these restrictive levels. Likewise, they cannot make commitments about their future actions.
Following Schnabel’s remarks, markets adjusted their expectations for monetary policy tightening, now foreseeing that policymakers will keep the deposit rate steady at 3.75% during the next month’s meeting. That contrasts with previous expectations, where there was speculation about a quarter-point increase after inflation acceleration in France.
Meanwhile, the yield on German 2-year debt, known for its sensitivity to policy shifts, dropped by four basis points to slightly above 3%. This level has remained relatively stable throughout the week.
Mixed signals and uncertainties in the Euro policy outlook
Policymakers with a more hawkish stance, including Austria’s Robert Holzmann, have already hinted that they might support another increase next month. However, Tuomas Valimaki from Finland has stated that the outcome of the September 14 meeting is uncertain.
Conversely, those with a more cautious approach have been focusing on the worsening economic forecast, a concern acknowledged by Schnabel. Yet, she emphasized that this decline doesn’t necessarily imply imminent severe or prolonged recession.
Schnabel further expressed that there are signs that the euro area’s economy may not be on the verge of a significant or long-lasting downturn. She also emphasized that with the data, policymakers may not commit to future policy changes.
