ECB policy normalisation still appropriate, says Schnabel

Bloomberg

The European Central Bank (ECB) is right to press forward with its plan to normalise monetary policy even as the war in Ukraine creates “elevated uncertainty,” executive board member Isabel Schnabel said.
“Continuing the path of policy normalisation is therefore the appropriate course of action,” Schnabel said in a speech in Cernobbio, Italy. “The speed of normalisation, in turn, will depend on the economic fallout from the war, the severity of the inflation shock. and its persistence.”
Schnabel spoke a day after the euro-area inflation rate hit yet another record in March, rising to 7.5% — more than triple the ECB’s 2% target.
“It is still reasonable to assume that part of current elevated inflation will vanish over time even without monetary policy action,” Schnabel said. “A considerable part of inflation is likely to prove more persistent, however.”
Schnabel identified three factors for this persistence: pipeline pressures, structural change, and wage catch-up. At the same time, the risks to economic growth are “tilted to the downside in the near term,” she said, adding that these “headwinds to growth can be buffered by fiscal policy.”
She also reiterated the ECB’s most recent guidance that sees the central bank ending net asset purchases in the third quarter and increasing interest rates “sometime after.”
Inflation in the 19-nation euro area hit a record 5.9% last month — nearly three times the ECB’s target — and is likely to quicken further following Russia’s invasion of Ukraine and the ensuing sanctions. The war has highlighted Europe’s dependence on fossil fuels and is likely to speed up efforts to find alternative, greener sources of energy.
Isabel Schnabel sees “fossilflation” continuing to be an important contributor of price growth, “climateflation” boosting food costs through more frequent droughts and floods, and “greenflation” being stoked by demand for metals and minerals needed in green technologies.
The European Commission suggests governments protect vulnerable citizens during the shift. How central banks should respond is still being debated, but Schnabel dismissed proposals to lift inflation goals or exclude energy from measures tracking price trends.
She defended last week’s ECB decision to gradually reduce stimulus, saying that while “prudence” is needed amid rising energy and food costs, the current outlook for prices “is no longer consistent with the exceptional policy measures we took to fight very low inflation.”
President Christine Lagarde and Chief Economist Philip Lane reiterated that officials would be flexible and gradual in adapting their stance.