[1/2]A view shows the banner of the European Central Bank (ECB), on the day of the monthly press conference following the ECB’s monetary policy meeting in Frankfurt, Germany, on September 14, 2023. REUTERS/Wolfgang Rattay/files Obtaining licensing rights
FRANKFURT (Reuters) – The European Central Bank could rule out raising interest rates again in light of the “significant” decline in inflation, and policymakers should not guide interest rates to remain steady until mid-2024, ECB Governing Council member Isabel Schnabel said. .
The statements represent a shift towards monetary easing by Schnabel, who is seen as the most influential voice in the conservative camp of policymakers and who led the largest interest rate increase in the history of the European Central Bank over the past year and a half.
Inflation in the euro zone fell to 2.4% last month from more than 10% a year ago after a record series of interest rate hikes. That has put the European Central Bank’s 2% inflation target in sight and cast doubt on policymakers’ warnings about the prospect of another two years of stubborn price growth.
Schnabel, who insisted just a month ago that raising interest rates should remain an option because the “last mile” of the inflation battle could be the toughest, said she had changed her position 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 joke often attributed to John Maynard Keynes. “Recent inflation numbers make another interest rate increase somewhat unlikely.”
Schnabel also cautioned against guiding markets on interest rate movements too far ahead, given rapidly changing inflation numbers that catch policymakers by surprise on the way down, just as they did on the way up.
European Central Bank President Christine Lagarde, French Central Bank President François Villeroy de Galhau, and Bank of Greece Governor Yannis Stournaras They have all guided fixed rates for the next “few” or “several” quarters, even when markets see interest rate cuts in early spring.
“We were surprised several times in both directions,” Schnabel said. “So we have to be careful about making statements about something that will happen in six months.”
Schnabel, a German, was the first ECB policy hawk to signal a shift in view. Her comments come after Bundesbank President Joachim Nagel said the November data had not changed his mind and that a rate hike was still possible.
Err on the side of caution
Markets are pricing in more than five 4% cuts in the European Central Bank’s deposit rate, with the first cut expected in March.
Schnabel has taken these bets back more modestly than some of her colleagues.
She said: “Central banks are more cautious, and I think they should be more cautious.” “After more than two years of above-target inflation, we have to err on the side of caution.”
Overall price growth was always expected to decline rapidly during the autumn, but the rapid decline in core inflation, which excludes volatile food and energy prices, is reinforcing this cautious optimism.
“This is absolutely amazing,” Schnabel said. “The latest inflation reading has given me more confidence that we will be able to return to 2% no later than 2025.”
But she said the inflation battle had not yet been won, with more progress needed on core inflation and slowing wage growth. The European Central Bank is also awaiting data to see if corporate profit margins will continue to shrink.
Schnabel warned that the uptick in price growth is still to come, with some budget subsidies expiring and energy prices higher than the previous year’s numbers being eliminated, so the rapid decline may be over for now.
“We must not declare victory over inflation prematurely,” she said. “We are on the right track but we have to remain vigilant.”
Schnabel said weak growth as a result of interest rate hikes by the European Central Bank is helping combat inflation but a deep or prolonged recession is unlikely, with recent survey data supporting expectations for a recovery.
Commenting on the debate over whether the European Central Bank should early halt reinvestments in its $1.7 trillion Pandemic Emergency Purchase Programme, Schnabel said purchase volumes were low and markets were anticipating an eventual end, so the decision “ “It wasn’t that big of a deal.” .
Balazs Kourani reports; Edited by Catherine Evans
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