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Economics
Central Banks


ECB CAN’T CLOSE DOOR TO FURTHER RATE HIKES, SCHNABEL SAYS

 * Inflation expectations fragile, Executive Board member says
 * It may take about two years to get inflation to 2%, she says

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By Zoe Schneeweiss
November 2, 2023 at 11:57 PM GMT+1
Updated on
November 3, 2023 at 9:29 AM GMT+1
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Listen

2:36

The European Central Bank’s fight against inflation might require another
increase in interest rates, according to Executive Board member Isabel Schnabel.

“After a long period of high inflation, inflation expectations are fragile and
renewed supply-side shocks can destabilize them, threatening medium-term price
stability,” she said in a speech Thursday in St. Louis. “This also means that we
cannot close the door to further rate hikes.”

The German Executive Board member spoke a week after the ECB left interest rates
unchanged for the first time in more than a year. Investors and economists
reckon the deposit rate will now remain at 4% well into 2024, with inflation
having slowed dramatically in recent months. The gauge dropped to 2.9% in
October.



Money-market wagers were little changed Friday, with almost 100 basis points of
rate cuts expected by the end of next year, starting with a quarter-point in
June.

Schnabel said that while it took a year to get inflation to that level from
10.6%, “it is expected to take about twice as long to get from here back to 2%.”

Expand


She also highlighted that price and wage rigidities mean underlying inflation is
stickier and that two key conditions need to be met for the measure — which
strips out volatile elements like food and energy — to evolve in line with ECB
forecasts:

 * The growth in unit labor costs eventually needs to falls back to levels that
   are broadly consistent with 2% medium-term inflation
 * Firms will have to use their profit margins as a buffer to limit the
   pass-through of the current strong wage increases to consumer prices

She also compared the final push to getting inflation to the ECB’s 2% goal to
the concluding stretch in a long-distance race, which “is often said to be the
hardest.”

“The disinflation process during the last mile will be more uncertain, slower
and bumpier,” Schnabel said, warning of new shocks such as tensions in the
Middle East, strikes at LNG plants in Australia and global warming as elements
that “could derail the disinflation process.”



She called for perseverance and vigilance.

“The inflation target is now within reach,” Schnabel said. “But let’s celebrate
only once we have truly tackled the last mile.”

Read More on the ECB:

ECB’s Knot Says Current Policy Is ‘Good Cruising Altitude’

ECB Rate Cuts Would Need Dramatic Shift in Economy, Kazaks Says

ECB’s Villeroy Says Patience Needed After ‘Justified’ Rate Pause

In remarks earlier Thursday, Dutch central bank chief Klaas Knot restrictive
policies will probably be needed for some time to return inflation to the 2%
target.

“Personally, and conditional on incoming data confirming the latest projections
from September, I see the current level of our policy rates as a good ‘cruising
altitude’ where they can remain for some time,” he said in a speech.



— With assistance by James Hirai

(Updates with market rate bets in fourth paragraph.)

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