Price expectations and demand key in ECB's next move, Schnabel says

Price Expectations, Demand Key for ECB’s Next Interest Rate Decision

Key Factors Influencing the ECB’s Interest Rate Decisions

FRANKFURT, Sept 30 (Reuters) - The European Central Bank should closely study a trio of domestic and global factors, which could either boost or ease price pressures, to decide if more interest rate hikes are needed, ECB board member Isabel Schnabel said on Wednesday.

The ECB has hiked rates twice this year after an energy price surge pushed inflation far above its 2% target, and markets see up to four more moves in the next year as high energy costs seep into the broader economy.

While Schnabel, an outspoken policy hawk, did not make clear her preferred policy path, she outlined the factors that could make or break the case for more policy action.

1. Impact of Energy Prices on Inflation Expectations

The first factor is whether a more persistent rise in energy prices would affect inflation expectations, especially after a long post-pandemic period of high inflation.

While repeated episodes of high inflation make prices more salient and could prompt households to bump up their own price or wage expectations, most measures of longer-term inflation bets remain around 2%, partly because of the ECB's own hikes, Schnabel said.

Anchoring of Inflation Expectations

"As long as expectations are firmly anchored and backed up by a track record of delivering on the inflation target, monetary policy can tolerate a more gradual return of inflation to target," she said in a speech in Luxembourg.

2. Resilience of Overall Economic Demand

A second factor is whether overall demand in the economy will remain surprisingly resilient, since higher costs are passed on to consumers more easily when growth is holding up.

3. Effects of Global Borrowing Costs

A third item to watch is how the recent surge in global borrowing cost, driven in part by rising US yields, impacts the economy, Schnabel said.

Potential Impact on Economic Growth

Some models suggest this could weigh on growth more than predicted by the ECB.

Medium-Term Inflationary Pressures

"It is therefore possible that the economy responds more to the recent tightening than currently assumed, which would dampen medium-term inflationary pressures compared with the baseline projection," Schnabel said.

Credit Dynamics and Restrictive Territory

Still, robust credit dynamics suggest that interest rates still do not restrict the economy and it was also possible that "restrictive" territory was now higher than earlier thought, she said.

(Reporting by Balazs Koranyi; Editing by Alison Williams)