Inflation issues not addressed during July ECB meeting, according to the central bank's president.
Gearing Up for More Inflation? ECB's Schnabel Hints at Continued Price Hikes
Looks like the inflation outlook remains gloomy according to European Central Bank (ECB) board member, Isabel Schnabel. During an interview with Reuters, she stated that the latest data doesn't appear to have alleviated the concerns from the July meeting when a 50 basis point increase was decided upon. Despite the surge in inflation to a whopping 8.9% in July, Schnabel suggests a further increase isn't entirely out of the question in the short term.
Inflation in the currency area has been driven by soaring energy prices due to the Ukraine conflict and inflation in food. "Even with the ongoing normalization of monetary policy, it will take some time for inflation to return to the two percent target," Schnabel warns. In fact, some economists predict double-digit inflation rates in Germany this fall due to sharply rising gas prices and a new gas surcharge.
Schnabel also addressed the risk of long-term inflation expectations spinning out of control. Most measures remain around the ECB's target of 2%, but indicators suggest an increased risk. If this risk materializes, it's known as the "de-anchoring" of inflation expectations.
A LOOMING ECONOMIC DOWNTURN?
The increased interest rates pose a risk to economic growth. While the labor market remains strong, a growing number of signs point to a slowing down. Schnabel notes the tourism industry's recent robust development, but she doesn't rule out a technical recession, especially if energy supplies from Russia face further disruptions.
The Eurozone must also deal with additional challenges such as drought and low water levels in major rivers, increasing the overall risks to growth. While a prolonged deep recession isn't a current concern for Schnabel, she emphasizes that even a shrinking economy alone won't necessarily alleviate inflationary pressure.
Meanwhile, the Eurozone faces other economic headwinds, including the impact of tariff-related supply chain disruptions that could potentially push prices higher. The ECB faces a delicate balance between supporting growth and managing inflation risks linked to external trade shocks.
- Isabel Schnabel, ECB board member, suggests that the ECB might deviate from its target and further increase interest rates, despite the risks they pose to economic growth.
- Schnabel warns that even with ongoing monetary policy normalization, inflation might not return to the ECB's target of 2% for some time, potentially leading to double-digit inflation rates in certain countries like Germany.
- In addressing the risk of long-term inflation expectations, Schnabel mentions the possibility of "de-anchoring" if indicators suggest an increased risk, which refers to the situation where inflation expectations could spin out of control.
- Despite the risk of a technical recession due to potential disruptions in energy supplies from Russia, a shrinking economy alone might not alleviate inflationary pressure, as the ECB faces other economic challenges such as tariff-related supply chain disruptions that could potentially push prices higher.
