The European Central Bank can take further interest rate hikes off the table given a “remarkable” fall in inflation and policymakers should not guide for rates to remain steady through mid-2024, ECB board member Isabel Schnabel told Reuters.
The comments mark a dovish shift for Schnabel, seen as the most influential voice in the conservative camp of policymakers that has driven the steepest increase in interest rates in the ECB’s history over the past 1-1/2 years.
Euro zone inflation tumbled to 2.4 per cent last month from above 10 per cent a year earlier after a record string of rate hikes. That has put the ECB’s 2 per cent inflation target within sight and raised doubts about policymakers’ warnings that another two years of stubborn price growth may be ahead.
Schnabel, who had insisted just a month ago that rate hikes must remain an option because the “last mile” of the inflation fight may be the toughest, said she had shifted stance after three unexpectedly benign inflation readings in a row.
“When the facts change, I change my mind. What do you do, sir?” Schnabel said in an interview, repeating a quip often attributed to John Maynard Keynes. “The most recent inflation number has made a further rate increase rather unlikely.”
Schnabel also warned against guiding markets on interest rate moves too far ahead, given rapidly changing inflation figures that are surprising policymakers on the way down, as they did on the way up.
ECB President Christine Lagarde, French central bank chief Francois Villeroy de Galhau and Bank of Greece Governor Yannis Stournaras have all guided for steady rates for the next “few” or “several” quarters, even as markets see a rate cut in the early spring.
“We have been surprised many times in both directions,” Schnabel said. “So we should be careful in making statements about something that is going to happen in six months’ time.”
Schnabel, a German, is the first of the ECB’s policy hawks to signal a shift in view. Her comments come after Bundesbank Chief Joachim Nagel said the November data did not change his mind and a rate hike was still a possibility.
ERR ON THE SIDE OF CAUTION
Markets are pricing in more than five cuts in the ECB’s 4 per cent deposit rate, with the first seen coming as soon as March.
Schnabel pushed back more modestly on these bets than some of her colleagues.
“Central banks are more cautious and I would argue they have to be more cautious,” she said. “After more than two years of above-target inflation, we need to err on the side of caution.”
Overall price growth was always expected to drop quickly through the autumn but the rapid decline in underlying inflation, which strips out volatile food and energy prices, is underpinning the guarded optimism.
“This is quite remarkable,” Schnabel said. “The recent inflation print has given me more confidence that we will be able to come back to 2 per cent no later than 2025.”
But the inflation fight has not yet been won, she said, with more progress needed on underlying inflation and slower wage growth. The ECB is also awaiting data to see if company profit margins continue to shrink.
An uptick in price growth is still coming, Schnabel warned, as some budget subsidies expire and high energy prices get knocked out from year-earlier figures, so the rapid drop may be over for now.
“We must not declare victory over inflation prematurely,” she said. “We are on track but we need to remain vigilant.”
Schnabel said weak growth as a result of the ECB’s rate hikes is helping the inflation fight but that a deep or prolonged recession is unlikely, with recent survey data supporting expectations for a recovery.
Weighing in on a debate about whether the ECB should make an early stop to reinvestments in its 1.7 trillion Pandemic Emergency Purchase Programme, Schnabel argued that purchase volumes were low and markets anticipate an eventual end, so the decision was “not such a big deal”.