Reuters-Frankfurt Isabel Schnabel, a member of the ECB board, said that the inflation forecast for the euro zone hasn’t changed since rates were raised in July. This suggests that she favours another rate hike next month, even though there are risks of a recession.
Last month, the central bank of the 19-country bloc shocked the markets by raising interest rates by 50 basis points because it thought inflation was getting worse.
Even a recession wouldn’t be enough to lower inflation, said Schnabel, head of ECB market operations.
“We raised rates by 50 basis points in July because of inflation,” she told Reuters. “Our July concerns remain. This view hasn’t changed much.“
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Policymakers are split between 25 and 50 basis points for a September rate hike. Schnabel’s words suggest she’ll support a larger hike.
As inflation pressures build, markets are pricing in a 55 basis point rate hike for September and 118 basis points by the end of the year.
At 8.9%, inflation is four times the ECB’s goal of 2%, and it could go even higher as rising energy prices cut into consumers’ buying power and slow down GDP.
Schnabel, a conservative policymaker, said he wouldn’t rule out higher inflation.
She predicted inflationary pressures wouldn’t disappear immediately. “It’ll be awhile before inflation reaches 2%.”
Schnabel highlighted that ECB estimates have been inaccurate in recent quarters, and therefore actual price growth numbers deserve more weight in policy choices.
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For Schnabel’s full Q&A, visit:
RECESSION?
The ECB’s rate hikes come as a recession caused by rising oil prices looms over the European Union. Tightening policies during a recession could worsen it.
Schnabel acknowledged the risk of a recession, but warned that inflation expectations may become “de-anchored,” implying a loss of trust in the bank’s commitment to meeting its goal.
“I wouldn’t rule out a technical recession if Russian energy supplies are further affected,” Schnabel added.
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“Droughts or low river levels have produced additional supply-side shocks,” she said. Germany seems to be severely damaged among large euro area countries.
Recessions reduce pricing pressures, but they don’t bring inflation back to target.
“Even in a recession, inflationary pressures are unlikely to abate,” Schnabel added. “The growth slowdown probably won’t curb inflation.”
Rate hikes will raise borrowing costs disproportionately on the bloc’s periphery, putting indebted states like Italy or Greece at danger.
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In recent weeks, the ECB has skewed bond purchases toward southern Europe to ease market tensions. Schnabel said that even though volatility and liquidity are high, the markets are more stable now.