ECB Policy Normalization Still Appropriate, Schnabel Says

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The European Central Bank is right to press forward with its plan to normalize monetary policy even as the war in Ukraine creates “elevated uncertainty,” Executive Board member Isabel Schnabel said.

“Continuing the path of policy normalization is therefore the appropriate course of action,” Schnabel said in a speech in Cernobbio, Italy, on Saturday. “The speed of normalization, in turn, will depend on the economic fallout from the war, the severity of the inflation shock. and its persistence.”

Schnabel spoke a day after the euro-area inflation rate hit yet another record in March, rising to 7.5% -- more than triple the ECB's 2% target. 

“It is still reasonable to assume that part of current elevated inflation will vanish over time even without monetary policy action,” Schnabel said. “A considerable part of inflation is likely to prove more persistent, however.”

Schnabel identified three factors for this persistence: pipeline pressures, structural change, and wage catch-up. At the same time, the risks to economic growth are “tilted to the downside in the near term,” she said, adding that these “headwinds to growth can be buffered by fiscal policy.”

She also reiterated the ECB's most recent guidance that sees the central bank ending net asset purchases in the third quarter and increasing interest rates “some time after.”

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