ECB Must Watch Upside and Downside Inflation Risks, Schnabel Says

(Bloomberg) -- The European Central Bank must be careful to consider inflation risks in both directions when it sets monetary policy, according to Executive Board member Isabel Schnabel.

The German, a contender to succeed Bundesbank chief Jens Weidmann, said consumer-price growth in the euro area will take longer to slow from its current level of more than 4%.

While rates should “decline visibly” next year, “uncertainty has increased around the pace and extent of the slowdown,” Schnabel said in a speech on Wednesday. “In such situations of elevated uncertainty, monetary policy makers need to focus on the entire range of possible outcomes to ensure that they will be able to deliver on their mandate.”

That means avoiding a premature tightening in response to a temporary inflation shock, as well as keeping a “watchful eye” on upside risks, she added. 

The ECB must “retain optionality to be able to act if needed, so as to maintain trust in our determination to defend price stability in a symmetric way and prevent a deanchoring of inflation expectations in both directions,” Schnabel said.

Crucial Meeting

The ECB is preparing for a crucial policy meeting in December, when it plans to set the course for post-pandemic stimulus, even as a new wave of Covid-19 infections engulfs Europe. Officials including President Christine Lagarde have insisted the current price spike is transitory, making an interest-rate increase unlikely next year.

Schnabel reiterated that view in her speech.

“The conditions for raising interest rates, as set out in our forward guidance, are very unlikely to be met next year,” she said. 

Earlier on Wednesday, Vice President Luis de Guindos made similar remarks.

“We’ll see what happens over the next months with the evolution of the economy, the evolution of inflation,” he told Bloomberg TV. “But my personal view is that it’s going to be quite unlikely.”

The ECB has struggled for more than a decade to deliver inflation in line with its goal, deploying negative interest rates and large-scale bond purchases in a bid to buoy prices. Its current projections see inflation easing to 1.5% in 2023. 

New forecasts, released next month, will probably be revised higher. Governing Council member Pierre Wunsch has said “it wouldn’t take much” for inflation to reach the 2% target that year.

Such a scenario would formally satisfy the conditions under which the ECB said it would consider tightening borrowing costs. At the same time, uncertainty about the economic outlook has increased as a result of the pandemic and persistent supply bottlenecks. 

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