ECB’s Schnabel Says Rates Need to Reach ‘Restrictive’ Level

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European Central Bank Executive Board member Isabel Schnabel says interest rates will have to move into “restrictive territory” to bring inflation back to target.

The danger of a policy overreaction by the ECB “continues to be limited, as real interest rates are still very low,” Schnabel said in an interview with Frankfurter Allgemeine Zeitung conducted Dec. 16, a day after the central bank’s most recent policy meeting, and posted on Saturday.

Reflecting on the ECB’s string of four interest rate hikes, Schnabel said the central bank is doing “whatever is necessary” to bring inflation back to 2%. She echoed the position of ECB President Christine Lagarde, who has said rate increases will continue “for a period of time.”

“According to our assessment, this interest rate lies in restrictive territory – that is, above the neutral interest rate – even if the exact level is yet unknown,” Schabel said.

With the central bank now pointing to a terminal rate higher than many market participants had expected, “achieving consensus” on the next steps “will certainly not get any easier,” Schabel said.

Read more: ECB Hikes by Half Point as Lagarde Warns of More Such Moves

The Germany policy-maker said the ECB underestimated the persistence of inflation earlier, “and initially did not take the signs of higher inflation seriously enough” as it pivoted from a phase where too-low inflation had been the main risk and pandemic-related uncertainty shadowed policy decisions.

“There was a concern that premature action by monetary policy might unnecessarily push the economy into another recession,” she said.

“Many people” underestimated the surge in prices as Covid-19 measures faded, Schnabel said. “They thought that the supply chain disruptions would be resolved more quickly. But that took much longer than expected.”

ECB projections anticipate inflation “notably” above 2% over an extended period likely to run into 2025.

“A long phase of very high inflation – as we are currently seeing – is therefore problematic. It makes it all the more important for us to react decisively,” said Schabel. “With inflation at times exceeding 10%, we can hardly speak of price stability.”

Also on Saturday, ECB Governing Council member Pierre Wunsch told the Belgian newspaper L’Echo that “the consensus is very clear” within the central bank: “We have a long way to go before we have a monetary policy that is tight enough to ensure that we get back to our 2% inflation target fairly quickly.”

“I’m very comfortable with the message that Christine Lagarde gave, which reflects very well the thinking of the vast majority of the Board, that we should expect several more rate hikes,” he added.

Schnabel told FAZ that said she expects “increasing pushback” to rate increases of the kind recently seen from Italy. “Governments generally don’t like interest rate hikes very much,” Schabel said. “They weigh on the fiscal position as it becomes more expensive for states to issue new debt.”

The ECB “can expect increasing pushback and we need to withstand it. That’s exactly why central banks are independent,” she said.

(Updates with Wunsch comments in 11th paragraph.)