Interview with Bloomberg
Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Carolynn Look and Alexander Weber on 22 and published on 23 November 2021
23 November 2021
The recovery has lost some steam after the initial reopening, and now the pandemic has returned with great force and some countries have imposed new restrictions, Austria even a full lockdown. How worried are you about the economic recovery?
Over the summer we saw a strong recovery, much stronger than many had expected. For a couple of weeks now, the incoming data have been pointing towards some moderation, mainly due to supply chain disruptions, which have proved to be stronger and more persistent than initially thought. Most recently, we are seeing a rise in COVID-19 infections and some containment measures in parts of the euro area, and this is likely to have a moderating effect on activity in the short run, in particular in the contact-intensive services sector. But I do not think that this will derail the overall recovery. Growth factors are quite strong over the medium term. The main reason for the bottlenecks is strong demand. Supply-side disruptions do not diminish growth potential. They merely shift activity over time. So my baseline is that we are going to see some growth deceleration in the short run, but then a continued strong recovery in the medium term.
What does all of this mean for the December staff projections and how will they change?
That's an open question. In general, the supply-side disruptions will have a moderating effect going forward, but I don't see a fundamental change in the growth outlook.
Do you have a timeline in mind for how long the supply-side disruptions and heightened energy prices might last?
This is one of the questions that we are discussing intensively. We've also asked the companies in our corporate telephone survey, and quite a few companies expect the supply chain disruptions to last longer than we thought. A significant share of them even think it's going to be longer than a year. But different sectors will be affected in different ways.
On energy, the technical assumption underlying our projections is based on oil futures curves. And these futures curves tend to be downward-sloping, partly due to what is called the "convenience yield". If you have a relatively tight oil market, there is an incentive to hold high inventories. But it's not clear that current futures curves are reflecting genuine expectations. If you look at forecasting errors, not just by the ECB but also by other forecasters, energy prices often play an important role.
An interesting question is whether there are certain structural factors that may affect energy price developments going forward. An obvious candidate is the green transition: in the coming years energy prices will likely go up because there's going to be more carbon pricing. Supply may also be less responsive. In the past, when oil prices were going up, there was a relatively strong supply-side reaction, for example from shale oil producers. This reaction has been more muted during the recovery, which may be related to the green transition because it may have become less attractive to invest in these types of facilities. Such structural factors are relatively hard to capture with our models. It's very possible that the pandemic is also accelerating certain structural trends, and we have to be aware of that. This increases the uncertainty going forward.
Do you think that the most recent headwinds – the increase in infections and new restrictions – will have an impact on the near-term inflation outlook, for example by shifting the demand from services to goods again and putting more strain on supply chains?
We haven't really done any analysis on that yet. I would say the general trends remain intact, which means that, compared with our September projections, I would expect higher inflation numbers going forward, mainly due to the fact that the supply chain disruptions are more persistent than we had initially thought. We will have to see whether the current measures will have an additional effect – it's too early to tell.
There's considerable uncertainty about the medium-term outlook for inflation. Many forecasters expect it to be below 2%, but some of your colleagues have warned that it may just as well be above the ECB's target. What's your assessment?
I expect our staff’s inflation projections to be revised upwards for next year, but I still think – and most people would agree – that inflation is going to decline over the course of next year. There are a number of technical factors, such as the reversal of Germany's VAT cut, which is going to drop out at the beginning of the year. We do expect that, over time, the supply-side bottlenecks are going to be gradually resolved. And it's not very likely that energy price developments are going to continue at the same pace as we've seen.
It's plausible to assume that inflation is going to drop below our target of 2% in the medium term. However, the risks to inflation are skewed to the upside. Uncertainty has increased with respect to the pace and extent of the decline. I don't think we can truly tell, on the basis of today's data, what is actually going to happen. In our decision-making, we have to take this increased uncertainty into account. What makes it plausible that inflation is going to drop below 2% again is that the disinflationary forces that we were facing before the pandemic may still be there. However, there could be structural shifts pointing in the other direction. As I said, that is very hard to capture with our models. We therefore have to look very carefully at the incoming data going forward.
Does it make a difference to the ECB's reaction function what the drivers of inflation are? In other words, are you just as likely to react if inflation is largely driven by supply constraints?
The standard prescription would be that monetary policy should look through supply-side shocks. But it matters how long such disruptions persist, because this may have an effect on inflation expectations. This matters greatly for us because rising inflation expectations would have ripple effects on the economy and may then have an effect on wages and inflation. What we're seeing at the moment is that long-term inflation expectations have started to realign with our 2% target. So far, I would say this is good news.
On the wage side, so far we have not seen any broad-based wage pressures that could give rise to wage-price spirals. But we do see in our corporate telephone survey that firms expect wages to grow more strongly going forward. There is also no sign that inflation expectations are de-anchored to the upside. But this hinges on the expectation that, if we found that there were very strong inflation dynamics threatening to de-anchor inflation expectations to the upside, we would react to that. We reacted to a potential de-anchoring to the downside. Given our symmetric inflation target, it's just as important that we react to a potential de-anchoring to the upside.
Does that mean that even if there's a medium-term outlook showing inflation at, or above 2%, that you will also need to see increased wage dynamics or changing inflation expectations in order to react to that?
For this we have our forward guidance. If we see that the inflation outlook improves so that the conditions of our forward guidance are fulfilled, there is a natural reason to act on that. We know that our policies are subject to lags. So if we were to wait longer, there would be a risk that we fall behind the curve. But at the moment, this is not the situation that we are facing. The situation now is different because we do not see the medium-term inflation outlook above 2%.
Investors quite stubbornly positioned for a rate hike in late 2022, even as you, President Lagarde and other policymakers said this was a highly unlikely scenario. Why is it so hard for the ECB to drive home its message?
Markets aren’t pricing in a 2022 rate hike anymore. There was a discussion about whether this reflected a lack of understanding by financial markets of our forward guidance. I don't think that that was the case, I always thought that our forward guidance was clear enough to be understood. I think it was rather a reflection of the uncertainty about the inflation outlook itself. There was, and remains, a certain divergence between ECB staff projections and what markets are expecting on inflation. It seems to me that it has become clear that it's very unlikely that a rate hike is going to happen next year. But it's also clear that the uncertainty remains very high and this is reflected in markets.
Is it still likely that the pandemic emergency purchase programme (PEPP) will end in March, as Lagarde said at the last press conference, even with the pickup in COVID infections?
This will be discussed in December. I personally think that the time plan is still valid, but we will have to see how this evolves until our December meeting.
What could lead to you possibly extending the PEPP?
The main criterion is the inflation outlook. We always said that the PEPP had the role to counter the negative effect of the pandemic on the inflation outlook. We have to make a judgement on whether what we are seeing now in some Member States is going to fundamentally change the inflation outlook, and at the moment I don't see that.
How do you think it will affect the pace of the PEPP in the first quarter? Will the ECB use the full envelope that's allocated to the PEPP?
That's another decision to be taken in December. If you look at survey expectations, it's not generally assumed that the entire envelope will be used.
A lot of economists expect the asset purchase programme (APP) to be increased from the 20 billion monthly amount that we have right now. Would you support that?
When we think about the December decision, I think we have to separate two questions. The first is: what's the amount of stimulus that is still needed? This is closely related to what we just discussed: how do we see the inflation outlook and how likely is it that we're going to get back, in a durable fashion, to our inflation target of 2% over the medium term? We have to ask ourselves: what is the overall desired monetary policy stance in light of the inflation outlook, taking into account the measures that are already in place? We have negative rates, forward guidance, the targeted longer-term refinancing operations (TLTROs) and – what I always stress – a very high stock of acquired assets under the APP and the PEPP. This provides a lot of accommodation. It's not about the flows, but it's mainly about the stocks. This will be the first part of the discussion in December.
The second part is: which kind of tools do we want to use in order to provide the stimulus that we find appropriate? This decision again has different components. The first question is: what's the most efficient instrument? This is what we look at in our proportionality assessment, where we analyse the benefits and costs of different tools. For example, if we look at our entire toolkit, in the pandemic, asset purchases have played a very important role. They helped us to restore market functioning. They incentivised people to take risks at a time when they weren't willing to do so. That was very important. The question we'll have to answer today is: what's the role of asset purchases going forward? There are, on the one hand, diminishing returns to asset purchases and, on the other hand, increasing side effects. Therefore, eventually, there will be a shift from asset purchases towards other tools, most importantly our forward guidance.
The second issue that we need to consider is how we can best protect the transmission of our policies. As you know, the euro area is vulnerable to fragmentation. If there's fragmentation, our policy is not transmitted fully to all parts of the euro area. This is an important aspect also when transitioning out of the net purchase phase of the PEPP. The PEPP has been extremely effective in that respect. It had this flexibility feature and what we've seen is that the possibility of purchasing flexibly by itself already had a stabilising effect. If you look at the numbers, you see that actual capital key deviations were occurring mainly at the very beginning of the programme, at the time of the market turbulence. Once markets had stabilised, it was no longer necessary. Of course, there was also flexibility over time and there was some flexibility across asset classes, but the flexibility across jurisdictions was mainly used at the very beginning of the pandemic. It's important to acknowledge the crucial role of that flexibility. The PEPP will not disappear once net asset purchases have been reduced to zero. Sometimes people talk about ending the PEPP. The PEPP is not going to end in March. The net asset purchases probably, but not the PEPP as such.
You've spoken about the importance of ending QE first and then raising interest rates. Other governors have also spoken about this wording, suggesting that there might be a preference to have a longer gap between the end of net asset purchases and raising interest rates. How do you feel about that particular issue?
I don't think that's something we have to decide at this point in time. For now, this forward guidance serves us well, and we may want to reconsider it at some later point.
What would be your preference for how to address the threat of fragmentation after the end of net purchases under the PEPP?
That's going to be discussed in December. But as I said, the PEPP won’t be gone.
There's been speculation about a new facility that isn't actively buying, but on standby, and that could buy more flexibly than the APP. Is this something you would consider?
The principle of the PEPP is precisely what you said. There is a possibility to buy flexibly. That is something that is very useful, but we already have that under the PEPP.
But you won't have that after March.
The PEPP is a flexible programme. This is what I can say.
Would it make a difference whether to transfer this flexibility to the APP, extend the PEPP in some way, or introduce a new facility?
At this point in time, the APP doesn't have this feature, while the PEPP has it. It's not clear to me that it's necessary to transfer flexibility to the APP.
How could the PEPP secure this kind of flexibility after the end of net purchases?
This will have to be discussed.
But it's important to you that this flexibility remains in some way and fragmentation can be addressed?
Certainly, yes. Especially in this transition phase, this is important. The coronavirus crisis phase isn't a black or white thing. Leaving the pandemic will be a process. This is also reflected in the sequencing of our measures. First, under the PEPP, the net asset purchases are stopped, and then at some later point, the reinvestment is stopped. It has to be a gradual phasing out of pandemic measures. Not everything can happen at once.
Is the euro area more vulnerable to fragmentation now than before the pandemic, because of higher debt levels?
I wouldn't necessarily say so. Of course we have higher sovereign debt levels, but on the other hand, we've had a crucial European initiative on the fiscal side, which sent a very strong signal that there's a strong commitment to stand together. I wouldn't underestimate the effect that this has, also on the risk of fragmentation. Next Generation EU is not a permanent facility, but it has been a major step that many people thought was unthinkable before the pandemic.
Some of the changes that we've seen floated are the idea of moving from monthly amounts for the APP to an envelope, similar to what we had for the PEPP. And there's also the proposal to include Greek debt in the APP. How would you feel about those changes?
On the question how the purchases are distributed over time, from a theoretical perspective, that shouldn't matter much − at least if you adhere to the stock view of QE. I think the distribution is of secondary importance. We saw that the flows mattered greatly at the time of the market turbulence. But in normal times, I don't think this is particularly important, which would imply that there's not necessarily a need to change what we have.
On the second point, I would say that Greece is benefiting greatly from the purchases under the PEPP. Going forward, there will still be a significant market presence under the PEPP due to reinvestment. It will have to be discussed whether that is sufficient.
You said one fundamental question you need to answer in December is how much accommodation does the euro area need, but at the same time, the inflation outlook is so uncertain. What's the time horizon for which you can even take decisions in December?
Again, that's something to be discussed, but I certainly wouldn't pre-commit over a too long period of time. That would be a mistake.
I explained this in a recent speech that I gave on 17 November 2021. At times of very high uncertainty, it's extremely important to retain some optionality in the monetary policy decision-making process. I called it, borrowing from Alan Greenspan, the risk management approach, which implies that when uncertainty is very high, one shouldn't enter into too long commitments, but one has to make sure that one can react to all types of contingencies. Our strong forward guidance protects us against premature rate hikes. But we also need to be able to react to surprises on the upside, should they materialise. We need to allow the data to come in so that we can get more clarity about what is going to happen after the unusual movements in inflation that we've seen this year and that we're also going to see next year. It would be risky to base our decisions entirely on the baseline if we know that the risks are skewed to the upside.
Should the TLTROs be extended past December?
The TLTROs have been a very effective tool in the pandemic. Besides asset purchases, this was our second main tool, which has supported bank lending, and therefore our monetary policy stance. The experience with TLTROs has been very positive. That was partly due to the innovation that we had, with extremely favourable interest rates, which was a response to the severity of the pandemic. It's an open question whether any additional operations will be needed. This is also related to other decisions that will have to be taken, for example, on the question of collateral eligibility or the question of the tiering multiplier. But I would say that for those decisions, we have a bit more time. This doesn't have to happen in December.
When you joined the ECB's Executive Board, you identified myths and half-truths that were being told in Germany about monetary policy and the ECB in particular. You've tried to address those in speeches and interviews. You've talked very frequently in German media. Do you feel like you've made any progress in the last two years? How difficult is it now that inflation is approaching these really high rates?
It's up to others to truly judge that. I identified a very important problem at the time and I tried to address it as well as I could, but of course I'm only one player in this big game. Certainly, some of the myths are still there. In the context of rising inflation, new narratives appear. The need to explain and to communicate to the general public is just as pressing as it was before, or maybe even more so. That's also why I'm so happy that in the strategy review, the communication to the general public was considered a key part of our communication – I would say probably for the first time in such an explicit way.
However, if you look at the entire discourse about inflation in Germany and in other countries, I do think it has become more differentiated. I cannot remember that general newspapers previously wrote so much about technical issues like base effects. There are now quite a few newspapers trying to explain these very unusual inflation dynamics without creating a sense of panic. Not all newspapers are doing that, but I would say quite a few. What my contribution is to that, I cannot say. But at least I think we observe a serious attempt to understand what's going on. The debate about inflation is very important. As long as this debate is conducted at a factual level, this is more than welcome.
But if there are misunderstandings in the public, it's our job to explain because monetary policy is such a technical matter. It's so hard to understand. Even for people who are trained in economics, it's sometimes hard to understand. We have to learn to find the proper language to explain those things to the general public. We rely on people’s trust. It is extremely important for the credibility and effectiveness of our monetary policy, and for preserving our independence. If there are concerns, we have to take them seriously and we have to think about how we can respond to them.
At times it's difficult because the commentary goes to a personal level that is not acceptable. There we can do very little. But as long as it's related to real-world phenomena, we can explain − and we are doing so. We've just published an explainer on inflation on our website, which tries to deal with some of the current concerns. We are also trying to go into different types of media. We're more active in social media, some of us even personally. We try to also talk to people who are active on YouTube and other channels. We have to find ways to be heard and ideally also understood. I think that's important.
Your name has been floated as a potential successor to the outgoing Bundesbank president Jens Weidman. If you were offered the job, would you take it?
The position of Bundesbank president is one of the most important positions in Germany. It comes with a lot of responsibility, not just towards Germany, but towards Europe. I certainly have a lot of respect for that position. You will understand that I cannot contribute to any of those speculations. I focus on the difficult decisions that we have to take in December.