Interview with t-online
Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Florian Schmidt on 15 September 2022
22 September 2022
Ms Schnabel, you come from Dortmund, a city of hard workers, or “Malocher” as they are referred to locally. How often do you think about these people in the context of high inflation?
Many people are worried that they won’t be able to pay their energy bills. Some even struggle to pay for food at the end of the month because prices are rising so much. This is of great concern to me because we at the ECB are responsible for price stability in the euro area. It is our task to ensure that annual inflation is at 2% over the medium term. Right now we are far away from our target – inflation is much too high.
Inflation in Germany was 7.9% in August. Are we ever going to see it go down?
Yes, but not immediately, unfortunately. Current inflation is mostly driven by a strong increase in energy prices. Another factor is the pandemic-related disruption to supply chains, which is making many products more expensive. We are also seeing food prices growing significantly around the world. Our monetary policy has little impact on what is happening on global commodity markets.
The ECB’s monetary policy affects inflation mainly through demand. When interest rates increase, loans become more expensive and saving becomes more attractive. This lowers the demand for products – both from consumers, who spend less, and firms, which invest less. Companies can then no longer hike their prices so quickly because there are fewer people who want their products. As a result, inflation falls. But this takes time.
How much time?
Probably a while still. Inflation may continue growing in the short term, despite the recent interest rate hikes.
So when is it going to fall again?
According to our projections, it will take until 2024 for inflation to stabilise around our 2% target.
In other words, you will continue to miss your inflation target for more than a year still. Have you failed?
As I said, current inflation is in large part due to factors we cannot influence directly. The war in Ukraine exacerbates the situation. It weighs on economic growth and drives inflation further up. But we have normalised our monetary policy step-by-step already since December of last year. First, we stopped additional purchases of government bonds. Then, since July, we have increased the policy rates twice significantly, leaving negative and zero interest rates behind. In early September we even hiked rates by 0.75 percentage points. This sent out an important signal: We are doing whatever is needed to bring inflation back to our 2% target.
Much too late, according to critics.
In anticipation of our measures, the interest rates in financial markets have started to rise much earlier, and they rose very fast. It is also worth remembering that ever since the pandemic started, we have been facing enormous uncertainty. When the Omicron wave hit last winter, we didn’t know whether we could be looking at widespread lockdowns once again. In the spring, it was impossible to say what impact the war would have on economic developments and inflation. In the view of the ECB’s Governing Council, the steps taken to reach our medium-term inflation target were appropriate at the time.
Some economists warned about higher inflation as early as spring. Why were ECB experts so wrong?
With the benefit of hindsight we can have a discussion about whether we should have acted a little sooner. But now the interest rate turnaround has started. We are on the right track.
The most recent interest rate hike was the largest in the ECB’s history. Some people are now worried this could choke off the economy. Which is worse: inflation or recession?
The ECB has a clear mandate – price stability. The signal we sent with our latest interest rate hike is clear: we are taking decisive steps to curb inflation and are making sure that it stabilises again at 2% in the medium term.
So economic development doesn’t matter for you?
A looming downturn would have a dampening effect on inflation. Of course, we take this into account when calibrating our monetary policy. However, the starting point of interest rates is very low, so it is clear that we need to continue raising rates.
Will that happen at the next meeting of the ECB’s Governing Council at the end of October already?
I’m expecting that the ECB’s Governing Council will continue to increase interest rates at its next meeting. What I cannot say is how big this hike will be or at what level we will stop increasing rates. We are deciding meeting by meeting, based on an assessment of all the economic and inflation data.
The ifo Institute expects Germany to face a “winter recession”? Do you expect that too?
For the euro area as a whole we are currently expecting an economic stagnation rather than a recession. Unfortunately, the situation in Germany is worse. Owing to its strong dependency on Russian gas, Germany has been especially hard hit. A recession may potentially be unavoidable here.
Will that also cause mass layoffs?
The labour market has proven to be very robust so far. The unemployment rate in the euro area is at a historical low; many countries, Germany included, are even experiencing a shortage of labour. Many firms may deem it in their interest to retain their staff despite challenging business conditions.
Does that mean things might not be so bad after all?
Hopefully, most workers will keep their jobs. But people will nonetheless feel the effects of the high prices, especially those on low incomes, because wages are not keeping pace with the rise in prices.
That may in turn result in high inflation becoming ingrained in the minds of many people. How much does that concern you?
Inflation expectations play a crucial role in our decisions. We see with some concern that more people expect inflation to exceed our 2% target also in the medium term. This makes it all the more important to send clear signals that people can rely on the ECB and that inflation will go down again.
And why should people believe you, now of all times?
Because the ECB has shown repeatedly in the past that it responds appropriately to economic developments. We acted decisively at times when inflation was too low, and during the coronavirus pandemic we contributed significantly to Europe emerging from this severe crisis in good shape economically. In this way we showed that citizens can rely on the central bank. People can trust us; we will fulfil our mandate and ensure price stability.
But what happens if that doesn’t work – and if people nonetheless expect persistently high rates of inflation?
One danger is the emergence of a wage-price spiral. If employees, against the backdrop of rising inflation expectations, demand very high wage increases and businesses then pass these on through even higher prices, wages and prices can drive each other up. But we see no signs of that happening at present. Wage growth has increased, but it is still moderate.
Really? In the current round of wage negotiations, the German metalworkers’ trade union IG Metall alone is demanding a huge wage hike of 8.2%.
So far, wage agreements are nowhere near keeping pace with inflation. Price-adjusted wages are falling, meaning that purchasing power is declining.
So a one-off agreement between employers and employees on a substantial increase would not automatically push up inflation?
We need to avoid that people expect permanently high inflation. That is why we are closely monitoring wage growth dynamics.
The governments of Europe are now deploying an array of instruments in an attempt to relieve the pressure on their citizens. Can the use of such instruments make up for the loss of wealth?
Higher energy prices are making Europe poorer. We have to transfer a larger share of our income abroad to pay for energy imports. Governments can’t do anything to change that in the short term. However, they can take targeted measures to ease particular hardships and prepare for the future. To this end, politicians should not disregard the effects of prices on behaviour. At the end of the day, higher energy prices will help us become less dependent on fossil fuels and thus achieve our climate targets. Moreover, investments are required in order to speed up the transition to renewable energies. When designing fiscal support programmes, care should be taken that they do not further fuel inflation.
Government relief measures for the broad mass of the population could stimulate demand and push up inflation. We might then have to raise interest rates even more. From a political perspective it may be favourable to appeal to a large share of the electorate with a package of relief measures. But it should always be at the back of our minds that, in the long term, we will have to collectively bear these costs.
Where do you yourself notice this at the moment?
I am able to cope with the current situation. People with higher incomes and wealth will of course be less well off too, but they can more easily draw on their savings to cushion the effects.
And what do you cut back on in your daily life?
First and foremost I try to lower my energy consumption. Not only to save money, but also for environmental reasons.
In conclusion let’s turn to Italy, where the anti-EU candidate Giorgia Meloni of the far-right party Fratelli d’Italia (Brothers of Italy) could become prime minister next Sunday. How concerned are you about that?
We never comment on political developments in individual countries. The ECB is independent and conducts monetary policy for the euro area as a whole. That is why we are guided by inflation in the euro area, even if the situation naturally differs from one country to another.
The level of government debt also differs. Italy has a very high level and will suffer correspondingly in the future from a rise in interest rates.
A country’s ability to service its debt hinges fundamentally on its economic growth. That means that countries must get on a sustainable growth path. The European support package Next Generation EU, which was introduced during the pandemic, plays a significant role in this respect. It’s very important that the growth projects, which are financed through this programme, are pursued consistently and fully implemented. That is a task for national governments. But we are all in the same boat. That’s why it’s important to also develop common solutions at European level in order to overcome the current crisis.
Ms Schnabel, many thanks for this interview.
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