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European Central Bank Executive Board member Isabel Schnabel said interest rates would have to move into “constrained territory” to bring inflation back on target.
Schnabel said in an interview with the Frankfurter Allgemeine Zeitung conducted on December 16, a day after the central bank’s most recent policy meeting, the risk of an overreaction by the ECB ” continues to be constrained, as real interest rates remain very low.” and posted on Saturday.
Reflecting on the ECB’s series of four rate hikes, Schnabel said the central bank is doing “whatever it takes” to bring inflation back to 2%. She echoed the views of ECB President Christine Lagarde, who has said rate hikes will continue “for a period of time”.
“In our judgment, this rate is in the restricted range – that is, above the neutral rate – even if the exact level is unknown,” Schabel said.
With the central bank now pointing to higher-than-expected final interest rates than many market participants are predicting, “reaching a consensus” on next steps “certainly won’t be easier.” at all,” said Schabel.
Read more: ECB rises half a point as Lagarde warns of more such moves
The German policymaker said the ECB had underestimated the existence of previous inflation, “and initially disregarded signs of higher inflation” as it pivoted from a period when inflation was so low. is the main risk and uncertainty associated with the pandemic of shady policy decisions.
“There is a concern that premature monetary policy action could unnecessarily push the economy into another recession,” she said.
“Many people” have underestimated the price increase as Covid-19 prevention measures fade, Schnabel said. “They think supply chain disruptions will be resolved faster. But that took longer than expected.”
ECB projections predict “notably” inflation above 2% for an extended period likely extending to 2025.
“A long period of very high inflation – as we are seeing – hence the problem. “It’s all the more important for us to react decisively,” Schabel said. “With inflation sometimes exceeding 10%, we can hardly talk about price stability.”
Also on Saturday, ECB Governing Council member Pierre Wunsch told Belgian newspaper L’Echo that “the consensus is very clear” within the central bank: “We have a long way to go before we have a long way to go.” having a tight enough monetary policy to ensure that we get back to our 2% inflation target fairly quickly.”
“I am very pleased with the message that Christine Lagarde sent out, which very clearly reflects the thinking of the vast majority of the Board, that we should expect some more rate hikes,” he added.
Schnabel told FAZ she expects “an increasing response” to the rate increases of the kind recently seen from Italy. “Governments are generally not very fond of raising interest rates,” Schabel said. “They weigh their finances because it becomes more expensive for states to issue new debt.”
The ECB “can expect growing resistance and we need to deal with it. That is exactly why central banks are independent,” she said.
(Updated with Wunsch’s comments in paragraph 11.)
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