Interview with ECB member Schnabel
Quick Summary
Isabel Schnabel, Member of the Executive Board of the ECB, was interviewed by Jana Randow and Alexander Weber on 15 February 2023. She discussed the current status of inflation and the ECB’s reaction function. Schnabel noted that the euro area is still far from achieving 2% inflation over the medium term, and that underlying inflation is very high and more persistent than headline inflation. She also discussed how the drop in energy prices will eventually feed into core inflation, and how wage growth and profits will play an important role in the assessment of underlying inflation. She concluded that the ECB’s determined action has kept inflation expectations anchored, and that a rate hike by 50 basis points is necessary to bring inflation back to 2%.
Full Story – Interview with Bloomberg
Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Jana Randow and Alexander Weber on 15 February 2023
17 February 2023
How much closer are we to achieving 2% inflation over the medium term, compared to December?
We are still far away from claiming victory on inflation. A broad disinflation process has not even started in the euro area. If we look at underlying inflation in particular, we are seeing that it is very high and more persistent than headline inflation. Underlying inflation developments play an important role in our thinking.
Energy prices have dropped quite significantly, headline inflation is slowing faster than expected. How will that impact the outlook for core inflation?
We are already seeing that the drop in energy prices is feeding into headline inflation, and eventually it will also feed into underlying inflation. The pass-through from lower energy prices to core inflation may be slower than on the way up, but eventually it is going to happen. What is more important when it comes to medium-term inflation is the development of wages and profits.
If we look at our wage trackers, we are seeing that wage growth has picked up substantially. It is expected to be around 4 to 5% in the years to come, which is too high to be consistent with our 2% inflation target even when taking productivity growth into account. Also, given a longer duration of wage contracts compared to the US and a more centralised bargaining process, one could expect wage growth in the euro area to be more persistent. So wage developments are going to be key for our assessment of underlying inflation and therefore also for inflation over the medium term.
The second important factor is profits. In the past, many firms were not only able to fully pass through their higher costs, but often they were even able to increase their profit margins. So we also need to look at the evolution of profits.
Finally, both price- and wage-setting depend on inflation expectations. Through our determined action, we have been able to keep inflation expectations anchored. We are seeing longer-term inflation expectations broadly anchored at 2%.
One important component in wage demands is past inflation. Would it be fair to assume that wage pressures will abate as inflation eases?
Hopefully. But wage growth has to be consistent with inflation returning to 2%, and that’s what we need to monitor. That said, it is highly unlikely that inflation pressures are going to vanish all by themselves.
Many forecasts see core inflation above headline inflation before long. How would the ECB deal with this situation, given its mandate focuses on the latter?
The attractor of headline inflation over the medium term is core inflation, which is why it matters so much for our monetary policy. We have defined our target in terms of headline inflation, but we know what drives headline inflation over the medium term is core inflation.
Considering all the points you’ve made so far, can you think of anything that would stop the ECB from delivering that half-point hike it has signaled for March?
Given the current level of policy rates and the level and persistence of underlying inflation, a rate hike by 50 basis points is necessary under virtually all plausible scenarios in order to bring inflation back to 2%. There is no inconsistency between our principle of data-dependency and these intentions because it is very unlikely that the incoming data is going to put this intention into question.
Where will rates go after March, based on information available today?
Let me explain how I see our reaction function. It comprises two decisions. The first is how far we need to…
