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Interview with Le Monde

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Eric Albert on 16 December and published on 22 December

22 December 2021

With the very rapid economic recovery on the one hand and the new wave of the pandemic on the other, the economic situation is hard to read. What’s your view?

Uncertainty is very high, as it has been throughout the pandemic. In general, I think the recovery continues. But owing to the recent wave of infections and the new variant, we are seeing headwinds in the short term. Now we’re looking at a weaker fourth quarter and this is likely to spill over to the beginning of next year. However, we expect a stronger rebound thereafter, so activity essentially shifts over time. This has been a recurring pattern during the pandemic. Households in the euro area have accumulated considerable savings, which supports the recovery. Hence, we see the recovery as being delayed rather than derailed.

Inflation has reached 4.9% in the euro area, 6% in Germany and over 9% in some of the Baltic countries. Are you worried?

Those high numbers are related to the specific situation of the pandemic. When the economy reopened, there was a strong rebound in demand. Supply couldn’t meet that demand quickly enough, partly because of health-related restrictions. That led to numerous supply chain disruptions and rising commodity prices, in particular energy prices. This has been amplified by a number of statistical effects, stemming from the fact that we’re comparing prices today with very low prices one year ago, in the middle of the pandemic, when they had collapsed. That distorts the picture somewhat.

All those factors are likely to either reverse or at least become less pronounced over the coming year. Take supply bottlenecks: we don’t know how quickly it will happen, but it’s clear that over time they will be resolved. Similarly, it’s highly unlikely that energy prices will continue to go up at the same speed. And lastly, base effects will disappear. We know that inflation is going to be elevated for a certain period of time, but also that it’s going to decline over the course of next year. We are less certain about how fast and how strong the decline will be.

We’ve been hearing this explanation about transitory inflation since last summer. But month after month, it always surprises on the upside…

Most economists hadn’t expected the extent of the increase in inflation. That’s why we are increasingly relying on surveys of companies and households to better understand what is happening. Some companies are telling us they expect the supply chain bottlenecks to last into 2023. We are well aware of the uncertainty around our inflation projections. There is a risk to the upside.

Another factor that plays a central role is wage developments. Current data point to moderate growth. However, we also learned from our survey among companies that they expect wage growth to pick up. It’s something we are monitoring very closely.

Officially, after inflation of 3.2% in 2022, you are projecting 1.8% in 2023. Is that still credible?

Our staff are using the best economic models available in order to make these projections. But everybody agrees that uncertainty is unusually high.

One of the trickiest questions is whether the economy is undergoing some fundamental structural changes that are not yet reflected in the models. Are we going to go back to the disinflationary environment that we had before the pandemic? Or are we entering a new phase that may be characterised by inflationary rather than disinflationary shocks?

And what’s the answer to that question?

Take climate change as an example. Previously, when oil prices were going up, shale oil producers quickly increased their levels of production, which put downward pressure on prices. That is not happening to the same degree now. This can probably be explained by the fact that, owing to the green transition, there is less incentive to invest in shale oil facilities. If that’s true, we are perhaps going to see stronger upward trends in oil prices in the future.

Are we therefore entering a “new normal”?

This remains to be seen. We should follow a risk management approach so that we can quickly respond should we see signs that inflation will stay more permanently at a level above our 2% target.

Despite these uncertainties, and the risk of higher inflation, the ECB only announced a very gradual withdrawal of its asset purchases, from the current rate of €90 billion per month to €40 billion from April, then €30 billion in the third quarter of 2022 and €20 billion in the fourth quarter. Is it fair to say that this is a very accommodative stance?

We have taken an important step towards the normalisation of our monetary policy. This has to be a gradual process – it can’t happen all at once. If we responded too quickly, there would be a risk of choking the recovery by tightening financing conditions too abruptly. We are taking a step-by-step approach to normalisation, the pace of which can be adjusted to the incoming data. We need to retain optionality to make sure that we sustainably reach our 2% target.

Nevertheless, the ECB has been carrying out asset purchases for six years now, the interest rate is -0.5% and normalisation of monetary policy has been pushed back several times. How will you achieve it this time?

The reason why our policies have been accommodative for so long is that inflation was stubbornly low. Despite all the measures we have taken, it has been hard to get medium-term inflation back towards the 2% target. Over the past year, however, we have made substantial progress, and it seems we are on the right path to achieving our target in a more sustainable manner. This is a precondition for policy normalisation.

And yet, on the contrary, the impression is that the ECB has had to do more and more every time, and that its measures are less effective every time, that more billions are always needed…

Because the interest rates were already very low, we had to use new tools, which have proven highly effective. But the effectiveness of some instruments diminishes over time. We have already bought a lot of bonds, and the balance of the benefits and costs of additional bond purchases deteriorates as the economy gains ground. This is why we slow down purchases now.

But given the prevailing uncertainties, this has to be gradual, also with a view to ensuring the smooth transmission of our policy across the entire euro area.

In this context, is it possible to imagine a return to a “normal” monetary policy – say a 0% interest rate – during your mandate (which comes to an end in 2028)?

I hope so. The developments over the past year give reason for cautious optimism. Before the pandemic, we were in an environment of relatively low growth and too low inflation for many years. But now we are seeing that inflation is picking up and inflation expectations are realigning with our target of 2%. This is precisely what can help us get out of the low growth, low inflation environment and back to a more normal world.


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