© Reuters. FILE PHOTO: Isabel Schnabel, member of the German advisory board of economic experts attends the 29th Frankfurt European Banking Congress (EBC) at the Old Opera house in Frankfurt, Germany November 22, 2019. REUTERS/Ralph Orlowski
(Reuters) – The European Central Bank must be patient with cutting interest rates as inflation could flare up again and recent data confirm fears that the ‘last mile’ of getting price growth down will be the hardest, ECB board member Isabel Schnabel told the Financial Times.
The ECB has been holding interest rates at record highs since September but the debate over policy easing is intensifying and markets see the bank starting to reverse course this spring given weak growth and fading price pressures.
But Schnabel cautioned against cutting too soon, arguing that past rate hikes have already made their peak impact and some worrying signs remain as a new, ‘critical’ phase of disinflation begins.
“Selling-price expectations in services, they have gone up for several months in a row,” the FT reported her as saying on Wednesday. “We see sticky services inflation. We see a resilient labour market. At the same time we see a notable loosening of financial conditions.”
Resurgent inflation is not the ECB’s main scenario but concerning data caution against easing policy too soon, especially as disruptions of shipping in the Red Sea have sparked concerns over fresh supply chain disruptions.
“I would argue that we are now entering a critical phase where the calibration and transmission of monetary policy become especially important because it is all about containing the second-round effects,” Schnabel said.
While conservatives or hawks in central bank-speak have argued patience in cutting rates, most have accepted that the next move will be a cut. While they have pushed back on bets for a move in April, a move around mid-year appears uncontroversial.
Schnabel also appeared optimistic that firms are absorbing some of the recent wage growth, as the ECB had long hoped, since economic growth is weak and they have little room to push higher costs onto customers.
“If demand is held back by restrictive monetary policy, it will be much harder for firms to pass through higher costs to consumers,” Schnabel said. “We are seeing some evidence that it is happening.”
“We have made substantial progress, and that is good news,” Schnabel said. “But we are not there yet.”
Source: Investing.com
