(Bloomberg) -- The European Central Bank's fight against inflation might require another increase in interest rates, according to Executive Board member Isabel Schnabel.
“After a long period of high inflation, inflation expectations are fragile and renewed supply-side shocks can destabilize them, threatening medium-term price stability,” she said in a speech Thursday in St. Louis. “This also means that we cannot close the door to further rate hikes.”
The German Executive Board member spoke a week after the ECB left interest rates unchanged for the first time in more than a year. Markets and economists reckon the deposit rate will now remain at 4% well into 2024, with inflation having slowed dramatically in recent months. The gauge dropped to 2.9% in October.
She also said that while it took a year to get inflation to that level from 10.6%, “it is expected to take about twice as long to get from here back to 2%.”
Schnabel also highlighted that price and wage rigidities mean underlying inflation is stickier and that two key conditions need to be met for the measure — which strips out volatile elements like food and energy — to evolve in line with ECB forecasts:
- The growth in unit labor costs eventually needs to falls back to levels that are broadly consistent with 2% medium-term inflation
- Firms will have to use their profit margins as a buffer to limit the pass-through of the current strong wage increases to consumer prices
She also compared the final push to getting inflation to the ECB's 2% goal to the concluding stretch in a long-distance race, which “is often said to be the hardest.”
“The disinflation process during the last mile will be more uncertain, slower and bumpier,” Schnabel said, warning of new shocks such as tensions in the Middle East, strikes at LNG plants in Australia and global warming as elements that “could derail the disinflation process.”
She called for perseverance and vigilance.
“The inflation target is now within reach,” Schnabel said. “But let's celebrate only once we have truly tackled the last mile.”
In remarks earlier Thursday, Dutch central bank chief Klaas Knot restrictive policies will probably be needed for some time to return inflation to the 2% target.
“Personally, and conditional on incoming data confirming the latest projections from September, I see the current level of our policy rates as a good ‘cruising altitude' where they can remain for some time,” he said in a speech.
(Updates with additional comments starting in fifth paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
