The ECB has a “limited” opportunity to raise interest rates, warns a member of the board of directors

The European Central Bank has left “limited” room to raise interest rates in smaller steps because government policies to protect households and businesses from soaring energy prices are keeping eurozone inflation higher for longer, according to a senior decision-maker.

Isabel Schnabel, a member of the ECB’s executive board, warned that market expectations of a move to a smaller interest rate hike at next month’s meeting had reduced borrowing costs, making it more difficult for a slower pace of monetary tightening.

Schnabel signaled his intention to continue with interest rate hikes of 0.75 percentage points He told at a conference in London that “the greatest risk for central banks remains policies that are falsely calibrated to assume a rapid decline in inflation and thus underestimate the persistence of inflation.”

According to Schnabel, the impact of the government’s support measures means the ECB will have to raise interest rates “further, probably into a restrictive range”, which should limit growth in order for euro zone inflation to fall from the record high of 10.7 percent in the year to October. back to the 2 percent target.

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“Many fiscal measures popular with voters, such as strict price ceilings or broad subsidies, will further increase medium-term inflation,” he said, adding that this “may ultimately force monetary policy to raise interest rates above .. this can be considered adequate without fiscal stimulus”.

With euro zone inflation about to peak and investors forecast to enter a recession next year, investors are pricing in a high probability that the ECB will raise interest rates by 0.5 percentage point next month, following a 0.75 percentage point increase in its last two policy increases. meetings.

But Schnabel said, “Markets’ expectations of a ‘turnaround’ have recently been at odds with our efforts to withdraw policy accommodation, further distancing the actual policy direction from the stance needed to restore inflation.”

The former German economics professor, who is recognized as the most outspoken member of the ECB’s governing board, said: “The data so far suggest that the scope for slowing the pace of interest rate adjustments remains limited, even as we approach the ‘neutral’ estimates. ‘ measure.”

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ECB officials estimate that the neutral rate – a level that neither stimulates nor constrains the economy under normal circumstances – could reach as high as 2 percent in the eurozone. The ECB raised its deposit rate to 1.5 percent last month, meaning its next move could be to cross that threshold.

Schnabel’s comments underscore the potential for a showdown at the ECB’s rate-setting meeting next month, where policymakers are divided between maintaining the pace and moving to smaller hikes amid signs of a recession.

Austrian central bank president Robert Holzmann told the Financial Times this week that he thinks the ECB should raise interest rates by another 0.75 percentage points. However, others, such as Mário Centeno, have called for a transition to a smaller interest rate hike at the Portuguese central bank.

The minutes Last month’s ECB meeting, published on Thursday, revealed growing concerns among governing council members that “the risk of inflation consolidating, second-round effects and a wage-price spiral may be increasing”.

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The ECB’s interest rate hike of 0.75 percentage points last month was supported by the “vast majority” of the council members, and only a “few” called for a smaller step.

“The tone of the meeting report contrasts with markets’ initially relatively dovish interpretation of the October press conference and clearly indicates that policy tightening still has some way to go,” said Ken Wattret, analyst at S&P Global Market Intelligence.

Since then, a sharp fall in wholesale energy prices in Europe, coupled with an easing of supply chain bottlenecks, has fueled hopes that eurozone inflation could peak, especially after price growth in the United States slowed in October.

Business confidence in Germany rose more than expected this month as fears of energy shortages and supply chain constraints eased, according to a survey by the Ifo Institute published on Thursday.