FRANKFURT (Reuters) -The European Central Bank must still raise interest rates significantly as broad disinflation has not yet started, even if overall price growth has been declining quickly, ECB board member Isabel Schnabel said in a Twitter Q&A on Friday.
The ECB has raised interest rates by 3 percentage points since July and promised a 50 basis-point hike for March, and Schnabel would not rule out another 50 basis-point move in May as well.
“Broad disinflation has not started in the euro area,” Schnabel said. “Rates must reach a sufficiently restrictive level … (and) we’ll keep rates high until we see robust evidence that underlying inflation returns to our target.”
“We need to stay the course and raise rates significantly further,” Schnabel said. “We need to see robust evidence that underlying inflation is returning to our target.”
When asked if that could mean 50 basis points in May as well, she said this would depend on incoming data.
Inflation has dropped by around 2 percentage points since its peak in October, and further falls are likely as natural gas prices retreat and high year-earlier figures get knocked from data.
But underlying price growth appears to be stubbornly high leading to fears that price growth could get stuck at levels above the ECB’s 2% target, partly due to quick nominal wage growth.
Schnabel also said that monetary policy has had “little effect” so far on inflation as it takes time for rate hikes to work their way through the real economy.
She acknowledged that rate hikes will lower economic growth but a recession is not certain and a “soft landing” was still possible.
The ECB will also start running down its oversized bond portfolio from next month to lift borrowing costs and Schnabel argued that some of the recent rise in yields already reflects this.
“The anticipation of balance sheet run-off has already likely contributed to rising bond yields in the euro area,” she said.
The ECB will initially allow 15 billion euros ($16 billion) worth of debt to expire and Schnabel said the market impact of this balance sheet run down should be “largely symmetric” to its past bond purchases.
($1 = 0.9347 euro)
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
