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ECB ready to act if inflation goal is hit sooner, says Schnabel

ECB's Schnabel says inflation will ease but lists risks
ECB's Schnabel says inflation will ease but lists risks   -   Copyright  Thomson Reuters 2021
By Reuters

FRANKFURT -Inflation in the euro area will “in all likelihood” ease as soon as next year but the European Central Bank is ready to act if it doesn’t, ECB policymaker Isabel Schnabel said on Monday.

Euro zone inflation has been rising more than expected but the ECB has stuck to its belief of a temporary spike caused by higher prices of oil and higher raw materials, and pandemic-related shortages in components such as microchips.

Schnabel, Germany’s representative on the ECB‘s board, sought to assuage concerns of a repeat of the 1970s, when inflation was nearly 8% in her country.

“Today, against the background of rising inflation rates, particularly in Germany, it was a matter of concern to me to alleviate people’s concern that inflation may remain persistently too high or even shoot up uncontrollably,” Schnabel told an audience of German entrepreneurs.

“In all likelihood, inflation will noticeably decrease as soon as next year.”

Prices in the 19-country euro zone grew by 3% year on year last month according to preliminary estimates, surging well above the ECB‘s 2% target for the first time in 10 years.

But the ECB expects price growth to ease back to 1.7% next year and 1.5% in 2023.

Schnabel said the central bank, which reduced the pace of its emergency bond purchases last week, was in no rush to tighten its policy unless inflation rose to its target sooner than expected.

“We will only start the normalisation process when we are confident of reliably reaching our inflation target,” she said.

“But should inflation sustainably reach our target of 2% unexpectedly soon, we will act equally quickly and resolutely.”

She listed three main reasons why the latter might happen: persistent disruptions to supply, structural changes such as the green transition and greater optimism among consumers.

“If we succeed in breaking the vicious circle of limited room for price increases, slow growth and declining inflation expectations, then we will be able to escape negative interest rates,” Schnabel said.

“There are mounting signs that the current fiscal and monetary policy mix can achieve that.”