The ECB will likely need to raise rates to a level that holds back growth – Schnabel By Reuters


© Reuters. FILE PHOTO: Signage is visible outside the constructing of the European Central Bank (ECB), in Frankfurt, Germany, July 21, 2022. REUTERS / Wolfgang Rattay / File photo

LJUBLJANA (Reuters) – The European Central Bank is more likely to need to raise rates of interest to levels that weaken growth to contain high inflation, which is threatened by growth within the euro area, ECB board member Isabel Schnabel said on Thursday.

With double-digit inflation within the euro area, the ECB is raising rates at a record pace, at the same time as the euro area economy moves into recession.

This has prompted some policymakers to weigh the advantages of future increases against the risks to growth.

But Schnabel, a frontrunner among the many ECB hawks who advocate higher credit costs, said the central bank should move forward, possibly reaching “restrictive territory” or a rate level that constrains economic growth.

“There isn’t any time to pause monetary policy,” Schnabel told listeners on the Bank of Slovenia.

“We could have to boost rates further, possibly in restrictive territory.”

The ECB’s deposit rate is currently 1.5%, and economists estimate the neutral level, which is neither restrictive nor stimulating, to be between 1.5% and a couple of%.

Schnabel pointed to various indicators pointing to the danger of everlasting high price growth, akin to rising wages and the so-called core inflation, which cuts off essentially the most volatile prices, but in addition market and consumer expectations.

This meant that a shallow recession is unlikely to bring inflation right down to the ECB’s 2% goal.

“Only a deep recession with a pointy rise in unemployment can significantly ease the inflationary pressure,” she said throughout the event. “That is unlikely at present, not least due to a powerful labor market, large savings surpluses and big fiscal support.”

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