ECB Executive Board member Isabel Schnabel warned in a speech that the “last mile” in disinflation process is the hardest, more uncertain, slower and bumpier. Inflation expectations are fragile, and ECB cannot close the door for further rate hikes.
In a candid analogy, Schnabel compared the disinflation process to a marathon, signifying the strenuous and prolonged effort required to bring inflation back to target levels.
“Disinflation really does seem like a long-distance race,” Schnabel stated, “When the runner enters the last mile, the hardest work begins” which requires “perseverance and vigilance”. She added, “The same is true for our fight against inflation.”
Schnabel’s words paint a picture of cautious optimism mixed with a stern warning against premature relaxation in monetary policy. “With our current monetary policy stance, we expect inflation to return to our target by 2025,” she affirmed.
However, she was quick to temper optimism with a dose of reality about the road ahead. “The disinflation process during the last mile will be more uncertain, slower and bumpier”.
“Continued vigilance is therefore needed,” Schnabel cautioned. “After a long period of high inflation, inflation expectations are fragile and renewed supply-side shocks can destabilise them, threatening medium-term price stability.”
“This also means that we cannot close the door to further rate hikes,” she added.
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