European Central Bank officials revealed a sharpening divide on the outlook for interest-rate hikes, with some favouring caution while Executive Board Isabel Schnabel member insisted this is no time for complacency.
With an increase in borrowing costs already pencilled in for the July 27th decision, chief economist Philip Lane and the Slovak and Lithuanian governors said there’s no urgency in committing already now about what to do at the subsequent meeting on September 14th.
But Schnabel struck a worried tone on the inflation outlook. In remarks chiming with hawkish colleagues who suggested the probable need for a September hike, she said that officials should “err on the side of doing too much rather than too little.”
The intensifying public debate subsequent to last week’s quarter-point rate increase underscores how ECB officials are approaching their traditional summer break in August wound up in disagreement over the inflation risks threatening the euro zone.
While some are in no mood to relax, others can’t see the point in binding themselves to a potential move almost three months away.
“September will be decided in September, July will be decided in July,” Lane said in Madrid. “It looks like another hike in July will be appropriate. And then basically we will see in September, that’s months away in terms of all the data we’re going to learn about between now and September, we’ll also have a full scale forecasting round.”
The remarks by Lane, champion of the ECB’s “data-dependent” approach to its rate decisions, contrasted considerably with those of Schnabel, whose speech in Luxembourg focused on the dangers to consumer prices.
“Risks of both a de-anchoring of inflation expectations and weaker monetary policy transmission suggest that there is a limit to how long inflation can stay above our 2% target,” she said, warning that labour demand “remains exceptionally strong.”
“Put differently, one of the key channels in policy transmission – if not the most important one – is currently not working as usual,” she added.
The comments put her firmly in the hawkish camp of the Governing Council, along with colleagues such as Bundesbank President Joachim Nagel. He said on Friday that rates may need to keep rising “after the summer break,” while Belgium’s Pierre Wunsch cautioned that hikes will continue even beyond September if core inflation doesn’t slow down.
The measure, which strips out volatile components like energy and food, slowed to 5.3% in May but remains well above the ECB’s 2 per cent goal. ECB chief Christine Lagarde said last week indicators of underlying inflation “remain strong” and show only “tentative signs of softening.”
Lane was more circumspect.
“What the market is confident in, and I think correctly because we’ll have something to do about it, is that inflation will come down to our target fairly quickly in the next couple of years to 2% thereabouts,” he said on Monday.
That chimes with the tone of other policymakers. After investors ramped up bets on a September rate move, Bank of France Governor Francois Villeroy de Galhau described wagers on hikes as “excessively volatile” and urged against drawing premature conclusions.
On Monday, Lithuania’s Gediminas Simkus and Slovakia’s Peter Kazimir agreed with the latter sentiment, saying it’s still too early determine whether a September increase is necessary. – Bloomberg
