ECB Executive Board member Isabel Schnabel commented yesterday on the challenges of underlying inflation in the Eurozone, noting that it has proven “sticky” and may not be significantly impacted by the recent fall in energy costs.

Schnabel stated that the influence of the energy price spike “may not drop out as quickly as it moves in” and added that “it’s not even clear whether it’s going to be completely symmetric in the sense that everything is even going to drop out at all.”

Regarding monetary policy, Schnabel acknowledged that the ECB possesses “a bit of flexibility” and emphasized that the central bank’s target is defined over the medium term, which prevents the need to “cause unnecessary pain.”

As for the recent crisis, Schnabel observed that there has been a shift from overnight deposits to time deposits, but no general deposit outflow from banks, suggesting the banking sector remains relatively resilient. She also noted that the crisis could have a disinflationary effect that the ECB must consider, but the magnitude of that effect remains uncertain at this time.

ECB Chief Economist Philip Lane, in an interview with German newspaper Die Zeit, emphasized the necessity for further interest rate hikes to ensure that inflation returns to the 2% target. Lane stated, “Under our baseline scenario, in order to make sure inflation comes down to 2%, more hikes will be needed.”

He also suggested that even in cases of limited financial stress, interest rates would still need to rise. “If the financial stress we see is non-zero, but turns out to be still fairly limited, interest rates will still need to go up,” he said.

Meanwhjile, Lane expressed optimism about moderating price pressures at earlier stages of production, which are expected to eventually impact consumer prices. “If you look at the earlier stages of production, at the farm gate prices, at the prices of the food ingredients, you will recognize: all of these have turned around,” he said.

The chief economist also dismissed the notion that a recession is required to bring inflation down, asserting that a soft landing for the economy is possible. Lane believes that the pandemic recovery can continue alongside decreasing inflation, as he noted, “We’ve lost so much growth momentum in the pandemic that it’s possible for the pandemic recovery to continue and for inflation to come down simultaneously.”

ECB Governing Council member Pablo Hernandez de Cos has emphasized that the central bank’s future monetary policy decisions will be highly dependent on the development of various risk sources, including recent financial market turmoil.

De Cos also noted that the intensity of monetary policy transmission will be taken into account in policy decisions. He observed that the ongoing tensions in financial markets have led to a further tightening of financial conditions, impacting the outlook for economic activity and inflation.

As the ECB prepares for its next meetings, De Cos highlighted that all these factors must be considered.

Reagrading inflation, he wared, “over the medium term, the main risk for inflation comes from a persistent rise in price expectations above our inflation target.”

Howveer, “the disinflation process could be accelerated further if the high tensions in financial markets were to be prolonged,”he added.

ECB Vice President Luis de Guindos recently shared his thoughts on the central bank’s approach to future rate hikes, emphasizing a data-dependent and cautious stance in light of the uncertainties arising from the financial sector problems in the US and Switzerland.

In an interview, de Guindos stated, “We raised rates by 50 basis points in March and we are open-minded with respect to the future… We are not pre-committing to any action.”

The impact of the US banking system and Credit Suisse events on the Eurozone economy is a pressing concern for the ECB. Over the coming weeks and months, de Guindos noted that the central bank would need to evaluate whether these events would lead to tighter financing conditions.

The ECB Vice President acknowledged that such events increase uncertainty and may result in tighter credit standards in the Eurozone, potentially affecting the economy with lower growth and inflation. However, de Guindos explained that it is too early to determine the intensity of this factor.

Regarding the ECB’s inflation target, de Guindos emphasized the importance of a timely return to 2% inflation within the two-year projection horizon and highlighted the crucial role of core inflation in achieving this goal.

He stated, “Headline inflation will decline quite rapidly over the next six to seven months as the base effects play in favor of a rapid reduction in inflation… What we want to see is a steady and clear convergence towards the 2% target. In that respect, core inflation is going to be key. It is very difficult to converge towards the 2% target in a sustainable way without a clear decline in core inflation.”

Full interview of ECB de Guindos here.