In an interview with Jutarnji List, ECB Executive Board Isabel Schnabel underlined the unpredictability surrounding the current inflation trajectory, cautioning against premature optimism despite recent encouraging data.
Schnabel stated, “We cannot say that we are at the peak (interest rates) or for how long rates will need to be kept at restrictive levels.”
She emphasized the importance of closely monitoring three key metrics to make future monetary policy decisions: inflation outlook, dynamics of underlying inflation, the efficacy of monetary policy transmission. Encouragingly, she noted that “all of them are moving in the right direction.”
However, the Board member didn’t shy away from highlighting possible headwinds. She pointed out, “I still see upside risks to inflation,” flagging potential supply-side shocks and stronger-than-anticipated wage growth, which could be offset by lower productivity growth. Firms might also face difficulty in absorbing these increased costs, which, if realized, could necessitate further hikes in interest rates.
While Schnabel acknowledged the downward trend in inflation as “encouraging,” she emphasized that it still remains considerably above the ECB’s 2% target. The aim, she said, should be to hit this target by 2025 to ensure inflation expectations “firmly anchored”. However, she cautioned about the challenges in reaching this goal, noting that the “last kilometre” may be the most challenging.
The recent surge in oil prices was another point of concern for Schnabel, suggesting that inflation could face upward pressures from unforeseen supply shocks, especially in sectors like energy and food. She added a call for vigilance, urging that “we must not be complacent, and we should not declare victory over inflation prematurely.”
