ECB Executive Board member Isabel Schnabel said in a speech over the weekend, “a considerable part of inflation is likely to prove more persistent, however – to an extent that, without monetary policy adjustment, inflation risks settling above our 2% target over the medium term.”
There are three factors that could make inflations “sticky”. Firstly, strong demand is contributing to rising pipeline pressures. Secondly, supply-side shocks are turning inflationary. Thirdly, wage catch-up is becoming more likely.
She added that continuing the path of policy normalization is “the appropriate course of action.” But, “the speed of normalisation, in turn, will depend on the economic fallout from the war, the severity of the inflation shock and its persistence.”
“We have stressed the importance of optionality and data dependence in our March Governing Council decision: we expect to conclude net asset purchases under our asset purchase programme in the third quarter, as long as the incoming data support the expectation that the medium-term inflation outlook will not weaken. We will hike interest rates some time after, as appropriate in light of incoming data,” Schnabel reiterated.
