The European Central Bank (ECB) shouldn’t rush its response to the Iran war and must be careful not to “overreact,” Executive Board member Isabel Schnabel said, while urging officials to remain agile and vigilant.
The German official, who’s widely seen as the ECB’s most hawkish interest rate-setter, said on Friday in Zurich that Europe is facing a “massive energy price shock” that’s caused a “sharp” increase in investors’ expectations of future inflation. But she said the ECB must “carefully weigh” its decisions.
“We have to be agile, we have to be vigilant, but there is no need to rush into action,” she said in her first public remarks since last week’s decision to keep borrowing costs steady.
“We have the time to look at the data and to analyse what is actually happening, whether there’s evidence of second-round effects, how strong the demand environment is and how likely it is that this inflation shock is becoming entrenched in inflation expectations and also in wage growth.”
Traders trimmed wagers on monetary tightening and now see slightly more than a 50% chance of a quarter-point increase next month. That compares with Monday, when money markets fully priced a move.
Schnabel’s remarks align with many other policymakers as the ECB assesses how best to tackle the economic fallout caused by the conflict in the Middle East. But while President Christine Lagarde said this week that officials won’t act without sufficient information, Bundesbank President Joachim Nagel and others have indicated a rate hike may need to be considered as soon as April.
The surge in energy costs emanating from the war recalls the 2022 inflation shock that followed Russia’s invasion of Ukraine and the economy is already feeling the consequences.
Belgian central-bank chief Pierre Wunsch told Bloomberg Television that there’d probably be a need to act if the conflict isn’t over by June. While urging patience in the meantime, he said a move is possible next month if needed.
Schnabel said the ECB will do whatever is needed to ensure inflation stabilises at 2% but will take a measured approach. It will keep an eye in particular on inflation expectations — which may be more fragile following the last price spike — and the price-setting habits of firms.
“If there is a more persistent impact on inflation, monetary policy will need to act and it will act and it will act decisively just as we have done it the last time,” she said. “So that is exactly what we need to look at. Is it something which becomes more permanent, which becomes entrenched in also core inflation and in wage growth and so on. Then we need to act.”
