European Central Bank (ECB) board member Isabel Schnabel has cautioned against hastily raising interest rates to combat the current surge in inflation. Speaking at a university lecture in Zürich, Schnabel emphasised the importance of thoroughly analysing whether the inflationary jump is becoming entrenched before taking action. Policymakers are currently debating whether to raise rates to prevent rapid price growth or to consider the shock as temporary.
Schnabel, considered a hawkish member of the ECB’s Governing Council, stated that there is no need for immediate action. She highlighted that the ECB has time to assess incoming data and determine the presence of second-round effects, the strength of demand, and the likelihood of the inflation shock becoming embedded in inflation expectations and wage growth. Financial markets anticipate three interest rate hikes from the ECB this year, potentially starting in April or June.
Schnabel argued that the current situation differs from the past, citing higher interest rates, reduced fiscal policy support, the absence of pent-up demand, and an altered supply-demand imbalance. This, she believes, provides the ECB with the opportunity for careful analysis before making any decisions. However, she acknowledged the potential for the energy shock to lead to lasting inflation.
Schnabel affirmed that the ECB would take action if a more persistent impact on inflation emerges, reiterating the bank’s commitment to acting decisively when necessary, as it did during the previous inflation surge. She said monetary policy would need to act if there is a more persistent impact on inflation, and it will act, and it will act decisively.
