(Bloomberg) — The European Central Bank shouldn’t hurry to lower borrowing costs and go below the so-called neutral rate to stimulate the economy, according to Executive Board member Isabel Schnabel.
While disinflation remains well on track, “the fight against inflation has not yet been won,” she said on Wednesday in Frankfurt. “A gradual approach to removing policy restriction remains appropriate.”
Her comments add to the debate among officials on the future rate path, after the ECB in mid-October lowered its borrowing costs for a third time this year but stayed tight-lipped on what happens next.
Since then, some of the more dovish policymakers have called for more rapid and steeper cuts worrying about weak growth and the risk of undershooting the 2% inflation target, while hawkish colleagues urge prudence and caution given still lingering upside risks to consumer-price growth.
With projected growth in 2025 “close to potential,” Schnabel said that there’s “no need to go below neutral” — a level of rates that neither stimulates nor restricts economic activity.
“We are soon getting closer to neutral territory,” she said, adding that the ECB then “will need more time to assess how restrictive policy still is on the basis of our outlook and incoming data.”
Schnabel said that services inflation — currently at 3.9% — is proving “a bit sticky” and there are still risks to consumer-price growth, not least from geopolitical tensions. Increased protectionism is a “major concern,” she said.
Speaking at a separate event in London, French central-bank chief Francois Villeroy de Galhau argued that it’s still too early to declare victory over inflation — even though it is now “in sight.”
Schnabel called next week’s US elections “a big event,” which “could be quite significant also for monetary policy, depending on what’s going to happen.” The ECB has done scenario analysis, she said, but in no case sees a need for imminent action.
At the same time, she reaffirmed expectations of a consumption-led economic recovery and said that today’s data could be a “turning point” for spending.
According to those figures, the euro area’s economy expanded more strongly than expected in the third quarter, growing by 0.4% — with even Germany avoiding the recession it was widely tipped to endure.
Schnabel said that financial conditions have eased “with real rates not far from neutral.”
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