ECB's Schnabel Underlines Persistent Inflationary Pressures, Downplays Recession Fears
Inflation concerns remain unaddressed in ECB President's perspective, post-July meeting assessment
In an interview with Reuters, ECB Director Isabel Schnabel stated that the inflation outlook has not dramatically changed since the July meeting. "The 50 basis point hike in July was justified by the inflation outlook, and I don't see a fundamental shift at the moment," she said. This means the upcoming ECB interest rate meeting on September 8 could potentially see further rate hikes, as decision-making is now centred on incoming data.
Schnabel expounded on the factors contributing to the surging inflation rates within the Eurozone - primarily soaring energy prices and food costs. July saw a record high of 8.9% inflation, more than four times the central bank's 2% target. Although she cautioned against ruling out the possibility of short-term inflation spikes, she remained optimistic about a return to the 2% target over the long term, despite the current monetary normalization process.
Schnabel also tackled concerns about runaway inflation potentially escalating long-term inflation expectations and deviating from the ECB's 2% target. While most indicators remain around the target, some measures suggest an increased risk. She emphasized the importance for the central bank to pay heed to these signs.
Addressing recession concerns, Schnabel acknowledged the deteriorating growth prospects amidst rising interest rates. However, she pointed to economic resilience in certain sectors and a relatively strong labor market as factors that mitigate the risk of further slowing the economy. Despite potential signs of a slowdown, she did not rule out the possibility of a technical recession, especially if energy supplies from Russia face further disruptions.
Schnabel also acknowledged economic challenges due to factors like drought and low water levels in major rivers, which have increased overall risks to growth. However, she does not foresee a prolonged deep recession due to these factors. She argued that even during a recession, inflationary pressures are not likely to ease without external intervention.
Despite the challenges ahead, Schnabel emphasized the importance of a balanced approach to monetary policy, striking a careful balance between addressing short-term inflation pressures and preventing an overcorrection.
The ECB's interest rate meeting on September 8 could see further rate hikes due to persistent inflationary pressures, as the decision-making process is now centered on incoming data. In her discussion of the factors contributing to surging inflation, Schnabel highlighted the impact of soaring energy prices and food costs on the Eurozone's business environment and economy, making headlines in general-news and the finance sector.
