ECB's Schnabel bolsters rate hike bets, warns of 'quiet erosion' of central bank independence
ECB Policy Outlook and Central Bank Independence
By Marc Jones and David Milliken
Rising Inflation Risks Amid Global Uncertainty
LONDON, May 7 (Reuters) - One of the European Central Bank's top policymakers warned on Thursday of the rising risk of higher inflation in the wake of the Iran war and of the "quiet erosion" of central bank independence at a difficult moment of rising global debt.
ECB Executive Board member Isabel Schnabel bolstered expectations that the bank could raise euro zone interest rates as soon as next month, saying companies and households were now reacting in a concerning way to surging global energy prices.
Corporate and Household Responses to Energy Prices
The German policymaker pointed to a growing share of euro zone companies planning to increase their prices despite subdued demand, while households have also raised their inflation expectations.
"If the energy price shock broadens, monetary policy will need to tighten to contain the risk of second-round effects threatening medium-term price stability," she told an audience in London. "This risk has increased in recent weeks."
Comparisons to Previous Inflation Surges
Schnabel went so far as to say the surge in fuel prices may feed through the economy faster than during the last inflation surge in 2021-22 because "memories of that painful inflation episode are still fresh".
Financial markets currently price in three or, more likely, four ECB rate hikes over the next 12 months, which would lift the ECB's key deposit rate to 2.75%-3% from its current 2% level.
Central Bank Independence Faces Threats
CENTRAL BANK INDEPENDENCE FACES THREATS
Political Pressures and Fiscal Dominance
The core topic of Schnabel's speech was that political attacks on central bank independence risk doing lasting damage by sowing doubts about their ability to act freely, thereby weakening the anchor underpinning long-term inflation expectations.
What makes the current moment "particularly concerning", she added, is that the political pressures come as rising government debt risks creating a tension between price stability and fiscal sustainability "giving rise to fiscal dominance".
Government Role in Inflation Control
Schnabel also appealed to governments and lawmakers to do their part in taming inflation, urging them to put public debt on a sustainable footing and to preserve the key regulations put in place after the financial crisis.
"The alternative – allowing fiscal and financial dominance to quietly erode the space for monetary policy amid blurred mandates – would progressively hollow out independence and ultimately lead to higher inflation and lower growth," she said.
Market Expectations and Policy Responses
Schnabel was joining a host of fellow rate-setters in backing likely rate hikes, probably as soon as June, to counter the ripple effects of the Iran war on consumer prices in the bloc, which imports most of its fuel.
Energy Prices and Monetary Policy Decisions
The extent to which rising energy prices spread into the wider economy would be key to determining whether and how much the ECB raised rates, she said in a question and answer session after her speech.
"If we see that ... the higher costs are being passed through ... that is then the sign that monetary policy has to react," Schnabel said.
Inflation Expectations and Wage Developments
Already, households' inflation expectations had risen, as had businesses' selling price plans, and waiting to see if higher wages materialised would be leaving things "too late", she added.
Mandates and Climate Change Policy
In terms of bolstering central bank independence she said they should "remain within their mandates" to prevent "blurring of the boundary between monetary and fiscal policy" but defended ECB policies to combat climate change, which she said posed an inflation risk.
(Writing by Francesco Canepa; Editing by Alex Richardson and Chizu Nomiyama )
