Recent economic figures and aggressive market bets on rapid interest-rate cuts have prompted Isabel Schnabel, an Executive Board member of the European Central Bank (ECB), to advocate for caution and patience. In a Financial Times interview, Schnabel highlighted persistent services inflation, a resilient labor market, financial conditions loosening significantly, and concerns over Red Sea tensions. She emphasized that these factors caution against hastily adjusting the policy stance.
Schnabel expressed the need for patience and caution, citing historical experiences where inflation could unexpectedly flare up. While markets anticipate rate cuts as early as April, ECB officials lean more towards a cautious approach, possibly delaying the move until June.
Schnabel pointed out that recent data does not alleviate concerns about the challenges in the economic landscape. Sticky services inflation, a robust labor market, and a notable financial market shift create a complex scenario. The recent Red Sea events have also raised fears of renewed supply chain disruptions.
Entering what she deems a critical phase, Schnabel stressed the importance of calibrating and transmitting monetary policy effectively to contain second-round effects. Despite suggesting that the peak of transmission might have passed, she noted that euro-area inflation has remained broadly stable since reaching 2.9%.
As policymakers contemplate the pace of easing, Schnabel addressed the challenge of determining the neutral rate of the economy. She highlighted the need for caution and small steps when cutting rates, emphasizing the possibility of pausing the descent if inflation proves stubborn.
The overall message from Schnabel is a call for careful consideration amidst economic uncertainties, advocating for a balanced and measured approach to monetary policy adjustments.
