ECB member sees limited room to reduce pace of monetary tightening

Member of the Governing Council of the European Central Bank (ECB), Isabel Schnabel warned that inflationary pressures in the Euro Zone should not dissipate quickly, in a context that also relies on expansionist fiscal policies from the bloc’s governments. Therefore, the current scenario calls for “more determined action” by the ECB to prevent inflation expectations from being unanchored from the entity’s 2% target.

During the Conference of Observers, organized this Thursday (24) by the Bank of England (BoE), the leader stated that she sees “limited” space to reduce the pace of monetary tightening in the Euro Zone. In its last two meetings, the ECB opted for increases of 75 basis points.

According to Isabel Schnabel, household inflationary expectations have shown a “remarkable rise”, and interest rates will need to rise further, “probably into restrictive territory”.

For her, the biggest risk for BCs at the moment is to base their monetary policy on a “false assumption that inflation will have a rapid decline”, after some pressures related to the war in Ukraine and other external factors reduce. The German economist also warned that real interest rates remain mostly negative in the Euro Zone, which indicates that monetary policy remains “very accommodative”.

tax risk

Isabel Schnabel also warned against fiscal measures whose effects could further fuel inflation in the medium term, such as “tight price caps and broad-based subsidies”.

Recently, G7 and European Union (EU) countries have discussed imposing a price cap on Russian oil, after imposing a similar measure on the country’s gas. In addition, Germany, France and other nations of the currency bloc have adopted electricity subsidies, following the rise in gas prices in Europe.

With this broad fiscal support, interest rates may have to rise above what would be considered adequate, according to the official. “Governments need to internalize the effects of their actions on future inflation and monetary policy,” she recommended. In any case, the ECB must remain “firmly focused on restoring price stability as quickly as possible”, she defended.

Nominated by Brazil, Ilan Goldfajn is elected president of the IDB

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