ECB Director Isabel Schnabel: Excessive inflation expectations could require a turnaround in interest rates

Created: 2022-02-09 17:40

In view of the high energy prices, ECB Director Isabel Schnabel is thinking aloud about a future turnaround in interest rates.

© Bernd von Jutrczenka/dpa

The ECB has recently again dampened expectations of a possible turnaround in interest rates.

But within the central bank, the discussion about an end to the ultra-loose interest rate policy is apparently gaining momentum.

Berlin – ECB Director Isabel Schnabel is thinking aloud about a future turnaround in interest rates in view of the high energy prices*.

The German economist admitted during a question and answer session on Twitter on Wednesday that interest rate hikes would not depress energy prices.

However, an extended phase of high energy prices could lead to expectations of higher inflation in the future.

ECB sticks to zero interest rate policy

The ECB is aiming for an inflation rate of 2.0 percent.

Fueled by expensive energy, however, this had soared to a record 5.1 percent in January.

Schnabel emphasized that the central bank must act when inflation expectations threaten to become unanchored given the current high level of inflation.

After the most recent interest rate meeting, ECB boss Christine Lagarde did not repeat her earlier assessment that a turnaround in interest rates in 2022 was very unlikely.

The European Central Bank (ECB) left the key monetary policy rate at a record low of 0.0 percent.

At the same time, banks must continue to pay penalty interest if they park excess funds at the ECB: the so-called deposit rate remained at minus 0.5 percent.

ECB: Bundesbank head Nagel considers a turnaround in interest rates possible

In view of the skyrocketing inflation, Bundesbank President Joachim Nagel believes that an interest rate hike is still possible this year.

In his first interview since taking office in January, he called for the European Central Bank (ECB) to take swift countermeasures.

"If the picture does not change by March, I will advocate normalizing monetary policy," Nagel said in an interview with the weekly newspaper "Die Zeit" published on Wednesday.

First of all, the bond purchases would have to stop.

“The first step is to end net bond purchases throughout 2022.

Then interest rates could rise this year.”

Nagel warned against waiting too long to normalize monetary policy: "In my opinion, the economic costs are significantly higher if we act too late than if we act early." This has also been shown by past experience.

"Later we would have to raise interest rates more vigorously and at a faster rate*", he explained.

The financial markets then reacted with more volatility.

"If we wait too long and then have to act more massively, the market fluctuations can be greater."

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