Interview with Handelsblatt
Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Jan Mallien and Frank Wiebe on 29 April 2022
3 May 2022
Ms Schnabel, the ECB is coming in for a lot of criticism these days and some media outlets are even attacking you personally. How do you handle that?
Above all, that shows that we still need to do better at communicating. People are understandably concerned. Inflation is extremely high, and that hits people on low incomes especially hard. That is why I try to explain our monetary policy also through new channels like Twitter and YouTube. We have an obligation in that respect.
Were you surprised that the topic has unleashed such emotions?
No, I wasn’t surprised. Before the pandemic, inflation had been low for a long time and was thus not an issue for most people. But once a certain threshold is passed, inflation suddenly becomes the subject of intense public debate. And that increases the expectations on us to react.
But what, if anything, can the ECB do? The main price driver is the high cost of energy, which you can’t influence at all.
It’s true that the current high inflation is mainly driven by energy prices. But energy is not the only factor. Initial estimates show that inflation in the euro area stood at 7.5 per cent in April, slightly higher than in the previous month, despite a moderation in energy price inflation. Core inflation, which excludes energy and food, climbed strongly to 3.5 per cent. So, we are seeing that inflationary pressures are becoming more broad-based.
The government is trying to partly cushion the effects through subsidies or tax relief. But isn’t that counterproductive? Surely that will ultimately strengthen demand and so push up inflation.
What matters most is to help people on low incomes in a targeted manner so that they can make ends meet. And it’s vital not to create wrong incentives. It makes little sense, for example, to promote energy consumption through price subsidies.
The relatively weak exchange rate of the euro is a factor that could strengthen inflation. How significant is it?
The euro has mainly lost value against the US dollar. Through the higher cost of imports, this has effects on inflation, which we are closely monitoring. But we do not target the exchange rate.
How concerned are you about the emergence of a wage-price spiral? The German metalworkers’ trade union IG Metall is demanding a wage increase of 8.2 per cent for the steel sector. The minimum wage in France is increasing quite significantly.
At present I don’t see such a spiral whereby rising wages create rising prices and vice versa. However, the data are backward-looking and we need to pursue a forward-looking monetary policy. So we can’t afford to wait until a wage-price spiral has already set in before responding.
What wage developments do you expect to see in the future?
There can be no doubt that we will see higher wage demands if inflation remains so high over a prolonged period. We need to prevent high inflation from becoming entrenched in expectations. Talking is no longer enough, we need to act.
What does that mean exactly?
In March we already discontinued net asset purchases under the pandemic emergency purchase programme (PEPP). Judging by current data – and it all depends on the data – I believe that we will be able to end net purchases under our regular asset purchase programme, or APP, at the end of June.
That means the ECB would only replace maturing securities after that time. And when will we see the first interest rate hike?
From today’s perspective, a rate increase in July is possible in my view. We of course have to wait and see how the data evolve up to the time of the decision. The first interest rate hike will in any case not take place until after the end of net asset purchases; we have committed to that.
And how many interest rate steps will there be? Many economists expect three this year and four next year, each by a quarter of a percentage point.
We will decide on that from meeting to meeting, on the basis of the incoming data. We are starting from an extremely low level. Real interest rates are still deeply negative and close to their historical lows. That means that even after the first increases, interest rates will remain at levels that continue supporting the economy. We are still quite far off from a neutral interest rate, that is the point as of which the economy is slowed.
The ECB’s key deposit rate now stands at minus 0.5 per cent. What is the level of the neutral interest rate?
This interest rate is not directly observable and can only be estimated. We haven’t yet had a detailed discussion on it in the ECB’s Governing Council. Nonetheless, some estimates show that it is well on the positive side.
In the past, the ECB proceeded very slowly in the case of interest rate steps below zero. Will that also apply to increases, or are steps of 0.25 percentage point more likely?
The lowering of interest rates below zero was uncharted territory, making it essential to move cautiously. This reasoning does not apply when moving in the opposite direction.
Why was the ECB so late in responding to rising inflation?
Inflation proved to be more persistent than was previously expected. But let’s recall that, since September, the macroeconomic environment has repeatedly shifted. Initially, many thought that, with vaccinations, we had largely overcome the pandemic. Then the Omicron variant gave cause for concern. As people realised that this variant was milder, the situation eased again. And then came the terrible war in Ukraine.
What is the mood in the Governing Council now?
The Governing Council is showing great unity overall. Naturally there are differing opinions and you can assume that the full range of meaningful monetary policy arguments are raised and discussed in our meetings. It is to our President Christine Lagarde’s great credit that we again and again find a consensual approach.
Many fear that stagflation is on the way, i.e. that inflation will keep increasing but the eurozone will fall into a recession – caused, for instance, by the war escalating.
The war clearly weighs on economic growth. As things stand today, I’m not expecting a stagflationary outcome; rather, I continue to see positive growth.
But if economic development becomes more difficult, the ECB will face a dilemma. It would then have to decide to either tackle inflation and deepen a possible recession, or to let prices take their course.
Our mandate is clear. We must maintain price stability – that is, keep prices stable over the medium term.
There is another dilemma that is frequently discussed. If the ECB increases interest rates too sharply, it could cause difficulties for countries with high levels of sovereign debt, such as Italy. This is stirring fears that the ECB simply can’t increase rates in the way that would be warranted on monetary policy grounds.
My previous answer also applies here. Our mandate is price stability and this alone determines our policy. Besides, many countries have taken on debts at very low interest rates and at the same time increased average maturities. So a rate hike would only have a gradual effect on countries’ average borrowing costs.
But in the long run a rate hike reaches the national budget.
What matters most of all is economic growth. That is why it is so important that euro area countries use the financial resources provided by the European recovery plan wisely to achieve a sustainable growth path.
But what if a country is subjected to a speculative attack that drives government bond yields unsustainably high?
We will decisively counter any sudden jumps in yields that have no fundamental justification. We will prevent euro area fragmentation driven by speculation. We already have a programme available for this as we can flexibly reinvest maturing securities under the PEPP.
There was also talk about the possibility of a new instrument that would enable targeted assistance for individual euro area countries. What might this look like?
We have shown in the past, for example during the European sovereign debt crisis and the pandemic, that we can create tailor-made instruments very quickly. We will do what is necessary and will design the programmes – and possible conditions for their use – so that they match the respective situation.
In the United States, the Fed has already announced that it is no longer fully replacing maturing securities, so as to shrink its balance sheet. What is the ECB planning to do?
It is premature to discuss this. We will continue reinvesting maturing bonds for an extended period of time past the date when we start raising our key interest rates. But, in principle, it makes sense to gradually reduce bond portfolios at some point in the future. We know that asset purchases have a strong influence on house prices, which are already elevated. And they influence the term structure of interest rates. A financial system that relies on bank-based financing is better off in an environment in which the spread between short and long-term rates is not too narrow.
Before the pandemic, inflation had been very low for a long time in the euro area and at the global level. Let’s look ahead to a time when hopefully the pandemic and the war are behind us and no new crises have emerged. What will the financial world look like then?
Probably different compared with before the pandemic. Some factors, like digitalisation, could continue to weigh on inflation. But there are other developments, such as the green transition and a possible decline in globalisation, that are likely to increase inflation over the medium term. Moreover, the future high demand for investment in the private and public sectors can be expected to push up interest rates. But if the transition to renewable energy sources succeeds, we will benefit from lower energy prices over the longer term.
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