European Central Bank (ECB) board member Isabel Schnabel has made a compelling case for the ECB to halt its reduction of borrowing costs. She contends that ongoing turmoil in the global economy is stoking price pressures, and there is a significant risk that inflation could surpass the bank’s 2% target in the medium term. This stance marks a departure from the current trajectory of the ECB’s monetary policy.
Over the past year, the ECB has implemented seven interest rate cuts in response to the rapid decline in inflation. Policymakers have already initiated preparations for yet another rate cut on June 5, with the intention of lowering the deposit rate to 2%. However, Schnabel, known for her hawkish views on policy, has effectively dampened these expectations. She has clearly advocated for maintaining the current interest rates, asserting that they are already at a level low enough to avoid impeding economic growth. “Now is the time to keep a steady hand,” Schnabel declared during a conference at Stanford University. “The appropriate course of action is to keep rates close to where they are today – that is, firmly in neutral territory.”
Schnabel’s perspective stands in stark contrast to the predictions of financial markets. Market sentiment suggests a 90% likelihood of a rate cut in June, along with expectations of one or two additional cuts in the following months. The situation is further complicated by the divergence between short-term and medium-term inflationary forces. Schnabel pointed out that in the near term, factors such as lower energy costs, a strong euro, sluggish economic growth, and the high uncertainty stemming from the US administration’s trade war could potentially drive inflation below the ECB’s 2% target. However, she also noted that monetary policy has a delayed impact on the economy. By the time additional policy easing measures take effect, the downward pressure on inflation may have dissipated, replaced by other forces that will drive up costs.
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