ECB Executive Board member Isabel Schnabel stressed the necessity of maintaining a proactive approach to monetary policy amid persistent inflation risks. In a speech today, she noted that “risks to the inflation outlook are tilted to the upside, reflecting both supply- and demand-side factors.”
Referencing IMF’s recent guidance, Schnabel noted, “The IMF has recently issued a clear recommendation: if inflation persistence is uncertain, risk management considerations speak in favour of a tighter monetary policy stance.”
She further explained the rationale behind this approach. “First, the costs of protecting the economy from upside risks to inflation are comparatively small, as the policy rate can be brought back to neutral levels faster than if policymakers acted under the assumption of low inflation persistence,” Schnabel said.
The second reason revolves around the high costs of reactive policies. Schnabel pointed out, “it is very costly to react only after upside risks to inflation have materialized, as this could destabilise inflation expectations and thus require a sharper contraction in output to restore price stability.”
Overall, Schnabel emphasized the need for data-dependent decisions that lean towards more action rather than less. “We need to remain highly data-dependent and err on the side of doing too much rather than too little,” she asserted.
She insisted, “We thus need to keep raising interest rates until we see convincing evidence that developments in underlying inflation are consistent with a return of headline inflation to our 2% medium-term target in a sustained and timely manner.”
