ECB Should Proceed Cautiously With Rate Cuts, Schnabel Warns
(Bloomberg) -- The European Central Bank shouldn’t lower interest rates too quickly as risks to inflation’s return to 2% persist, according to Executive Board member Isabel Schnabel.
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While data have broadly confirmed the ECB’s baseline outlook, bolstering confidence that the price target can be reached by the end of 2025, services inflation remains elevated and could yet hold back the overall retreat, Schnabel said Friday.
“Given that the path back to price stability hinges on a set of critical assumptions, policy should proceed gradually and cautiously,” she said in a speech in Tallinn, Estonia. “The pace of policy easing cannot be mechanical. It needs to rest on data and analysis.”
Investors are pricing two or three more rate cuts this year. But while ECB officials appear set to cut rates for a second time on Sept. 12, Schnabel’s remarks chime with warnings from some influential Governing Council members in recent days that the battle against inflation isn’t over.
Germany’s Joachim Nagel said late Thursday that officials shouldn’t rush to loosen monetary policy since their goals, while in sight, aren’t yet achieved. ECB Chief Economist Philip Lane stressed at the weekend that the return to 2% “is not yet secure.”
Bolstering the case for a reduction in September have been data showing a moderation in euro-zone wage increases, as well as expectations for August inflation to slow to a three-year low. Those figures are due later Friday. Reports from Germany, France and Spain have already revealed sharp slowdowns.
Schnabel, though, cautioned that the current level of headline inflation “understates the challenges monetary policy is still facing.”
“In particular, domestic inflation remains high at 4.4%, largely reflecting persistent price pressures in the services sector, where disinflation has effectively stalled since last November,” she said.
At the same event, Latvia’s Martins Kazaks also said that “inflation in the services sector is still relatively sticky and high.” That’s why the ECB “cannot rush” on interest rates, but should stick to a “paced” decrease in borrowing costs, he added.
“Even with this inflation episode behind us, even with growth gradually coming back, we are still not really on the safe ground,” Kazaks said. But he reiterated that he’s “open” to discuss another reduction in September.
Finland’s Olli Rehn said at the panel that weaker economic-growth data reinforce the case for a cut in less than two weeks.
--With assistance from Mark Schroers.
(Updates with comments from Kazaks and Rehn starting in last three paragraphs.)
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