The European Central Bank’s fight against inflation might require another increase in interest rates, according to Executive Board member Isabel Schnabel.
“After a long period of high inflation, inflation expectations are fragile and renewed supply-side shocks can destabilize them, threatening medium-term price stability,” she said in a speech Thursday in St. Louis. “This also means that we cannot close the door to further rate hikes.”
The German Executive Board member spoke a week after the ECB left interest rates unchanged for the first time in more than a year. Investors and economists reckon the deposit rate will now remain at 4% well into 2024, with inflation having slowed dramatically in recent months. The gauge dropped to 2.9% in October.
Money-market wagers were little changed Friday, with almost 100 basis points of rate cuts expected by the end of next year, starting with a quarter-point in June.
Schnabel said that while it took a year to get inflation to that level from 10.6%, “it is expected to take about twice as long to get from here back to 2%.”
She also highlighted that price and wage rigidities mean underlying inflation is stickier and that two key conditions need to be met for the measure — which strips out volatile elements like food and energy — to evolve in line with ECB forecasts:
She also compared the final push to getting inflation to the ECB’s 2% goal to the concluding stretch in a long-distance race, which “is often said to be the hardest.”
“The disinflation process during the last mile will be more uncertain, slower and bumpier,” Schnabel said, warning of new shocks such as tensions in the Middle East, strikes at LNG plants in Australia and global warming as elements that “could derail the disinflation process.”