ECB Work Unraveled by Markets: Euro zone growth has slowed, contrary to expectations a few months ago. This differs from expectations. This does not eliminate the need to boost rates. Isabel Schnabel, a European Central Bank board member, feels this attitude is emerging since the markets have undone some of its prior work.
The European Central Bank (ECB) has raised interest rates at every policy committee meeting for 13 months. Now that the economy is faltering, policymakers must make a tough choice. There is a decision to be made regarding whether to keep hiking interest rates at the same rate or raise them again, likely for the last time, to get inflation to 2%. Now, both options are being considered.
Schnabel, a conservative and lifelong supporter of stiffer rules, is aware of the current growth challenges but does not take a firm position on the next strategic move. She cites several reasons why the target may not have been attained yet, despite her claims. Though she said it was done, it is not.
In recent months, market expectations for future interest rates have shifted. Because the growth picture is worsening, market expectations have changed. In a Frankfurt conference speech, Schnabel said this balance might destroy the ECB’s hard work, requiring greater action. This lecture answered whether this re-calibration affects the ECB’s work.
Also Read: ECB Chief Warns Prolonged Inflation Challenges: Amid Economic Shocks
Schnabel remarked something uncommon when he noted real risk-free interest rates have fallen over a wide range of maturities and are back to February’s Governing Council meeting levels. She believes investors’ economic growth, inflation, and monetary policy projections altered, thus everything changed. She blames investors for this move. A decline of this scale could hinder the central bank’s efforts to return inflation to target in a reasonable time.
Some policymakers like the concept of extending rate hikes in exchange for a vow to keep rates constant. Many individuals are interested in this idea. Schnabel disagrees with this notion and worries about its economic viability. If it worked, trading the current need for money supply tightening for long-term rate maintenance would raise concerns about time inconsistency, she believes. She argues this because the scenario requires greater money tightening.
Schnabel investigates the job market’s tightening, signaled by new signals. This state is characterized by new tightness. Shortage of workers could lead to higher wages, which could raise inflation. Schnabel hasn’t found any convincing evidence that the bloc is entering a deep recession, even though economic growth is decreasing.
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