In a speech today, ECB Executive Board member Isabel Schnabel addressed the recent declines in inflation across parts of the Eurozone, describing them as “welcome developments.” However, she cautioned that the “current level of headline inflation understates the challenges monetary policy is still facing.”

Schnabel highlighted that domestic inflation remains elevated at 4.4%, driven largely by “persistent price pressures in the services sector,” where disinflation has stalled since last November. She pointed out that the continued high inflation momentum, particularly the annualized three-month-on-three-month change, indicates that services prices are still rising at a significant pace of almost 5%.

Schnabel noted that while incoming data broadly supports ECB’s baseline outlook, caution is needed as policy rates approach the upper band of the neutral rate, “the less certain we are how restrictive our policy is”

The pace of policy easing, she emphasized, “cannot be mechanical” and must be guided by data and analysis to ensure that monetary policy does not itself become a factor hindering disinflation.

Full speech of ECB’s Schnabel here.

Bundesbank President Joachim Nagel delivered a strong message overnight, cautioning that a timely return to price stability cannot be taken for granted.” He emphasized that ECB must tread carefully and “must not lower policy rates too quickly,”

“We are not there yet. While our 2% target is in sight, we have not reached it,” he added.

Nagel highlighted concerns that inflation, although nearing 2% target in late summer, is likely to rebound and remain above target well into 2025 due to persistent increases in service costs.

Addressing the differing views within ECB’s Governing Council, Nagel acknowledged the “intense” debates that typically accompany “turning points in the interest-rate cycle”.

However, he sought to dispel any notion of broader disagreement, stating, “When making their decisions, monetary policymakers are always faced with some degree of uncertainty. That is why a certain diversity of opinion among them as well as scope for their own judgment are considered features, not bugs.”

ECB Chief Economist Philip Lane noted at a conference today that while the second half of this year will still witness “plenty of wage increases,” the momentum is expected to taper off significantly.

Lane emphasized that “the catch-up is peaking now,” suggesting that the pace of wage hikes will slow substantially over the next two years.

Lane highlighted the “lot of progress” made in reducing underlying price pressures, pointing out the rising optimism surrounding the anticipated deceleration in wage growth. “This is where the confidence in returning to target comes from,” he added.

In a panel discussion today, ECB Governing Council member Klaas Knot emphasized the need for a more restrictive fiscal policy to support the central bank’s efforts in curbing inflation.

Knot stated that the ECB has “assumed most of the burden of bringing inflation down,” but he added, “A more restrictive fiscal policy would have been desirable.”

He also highlighted the impact of interest-rate hikes on debt-servicing costs, suggesting that these should be offset by higher primary fiscal balances.

Knot pointed out that increased spending by the European Union should be balanced by reduced fiscal space at the national level, noting, “After all, the national and European taxpayer is ultimately one and the same person.”