© 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//File Photo
LONDON (Reuters) – European Central Bank board member Isabel Schnabel pushed back on Thursday against calls from many of her colleagues for smaller interest rate increases by the ECB, saying this could hamper efforts to bring down inflation.
The ECB, determined to tackle runaway prices, has increased rates by a record 75 basis points at its last two meetings but several central bank governors, including some who normally favour higher rates, have opened the door to a gentler pace.
However Schnabel, the most influential voice in the hawkish camp, said this was premature and could even prove counter-productive.
“Incoming data so far suggest that the room for slowing down the pace of interest rate adjustments remains limited, even as we are approaching estimates of the ‘neutral’ rate,” she told an event in London.
“The extraordinarily large degree of uncertainty surrounding such estimates implies that they cannot serve as a yardstick to inform the appropriate pace of interest rate adjustments. Instead, policy needs to remain data-dependent.”
She argued that expectations for a shallower rate path are even working against the ECB, taking the actual policy stance further away from what is required to bring inflation back to its 2% target.
Earlier this week, Austria’s Robert Holzmann, the most outspoken hawk at the ECB, backed a further 75 basis point increase, but the Netherlands’ Klaas Knot and Germany’s Joachim Nagel appeared to be open to a 50-basis-point hike, as is expected by financial markets.
Speaking in Milan just before Schnabel, ECB vice-president Luis de Guindos said the next move would depend on the data but said he did not expect eurozone inflation to rise much further. It hit 10.6% in October.
“For headline (inflation)… I think that we’re there in terms of the peak, perhaps one decimal point up or down, it will be hovering, but I think that in the first half of next year we will see a decline,” he told an event.
Policymakers have been adamant that rates need to increase further but they can’t fully agree on their ultimate destination or pace, the account of their last meeting showed on Thursday.
“A discussion took place on the use of concepts such as the ‘neutral rate’ or the ‘terminal rate’ consistent with inflation returning to target over the medium term, with different views expressed on the link between these measures and projection scenarios or on their steady state properties,” the ECB said in the account.
Dutch governor Knot expressed doubts over market expectations for the ECB’s deposit rate, currently at 1.5%, to peak at 3%.
“Market expectations are that we will raise rates up to 3% in the first half of next year, and that they will go down from the second half of 2023. In all honesty, I’m not sure about that,” Knot told a hearing at the Dutch parliament.