ECB Executive Board member Isabel Schnabel said in a Bloomberg interview, “we are still far away from claiming victory”, adding that “we may have to act more forcefully.” She also noted that a broad disinflation process has not even started.” Meanwhile, “wage growth has picked up substantially” and could be “more persistent.
Schnabel also indicated that market pricing of a terminal rate of 3.50% may be too optimistic. “Markets are priced for perfection,” she said. “They assume inflation is going to come down very quickly toward 2% and it is going to stay there, while the economy will do just fine. That would be a very good outcome, but there is a risk that inflation proves to be more persistent than is currently priced by financial markets.”
A 50 basis-point hike next month is “necessary under virtually all plausible scenarios,” she said. “There is no inconsistency between our principle of data-dependency and these intentions because it’s very unlikely that the incoming data is going to put this intention into question.”