FRANKFURT (Reuters) – European Central Bank interest rate hikes could take longer than usual to pass through to the real economy and their impact may be more muted than usual, ECB board member Isabel Schnabel said in a newspaper interview.
The ECB has raised rates by a combined 375 basis points in the past year in the hope of taming inflation and investors expect another two small moves in July as consumer price growth could still take years to fall back to 2%.
“Given the current shortage of workers, one could expect monetary policy transmission to be weaker than usual,” Belgian newspaper De Tijd quoted her as saying in an article published on Wednesday.
Schnabel added that loans with fixed-term rates have also become more prevalent and so it may take longer than previously to see the impact of tighter monetary policy as loan terms get repriced over several years.
“Given the high uncertainty about the persistence of inflation, the costs of doing too little continue to be greater than the costs of doing too much,” Schnabel, the head of the ECB’s market operation, said.
If policy was not forceful enough, inflation would get entrenched and would become more costly to fight it, she added.
Schnabel played down the recent drop in underlying inflation, arguing that even a peak in the indicator would not be “sufficient to declare victory,” as she was looking for more convincing evidence that price growth will fall to 2% in a timely manner.
She also played down the value of the ECB’s own projections, arguing that point estimates are misleading since that sort of precision is not possible.
“Rather than constantly explaining the inaccuracy of the projections, it would be better for our credibility if we published them with confidence bands,” she said. “Transparency will strengthen our credibility, although I don’t deny that it is a challenge to communicate clearly on this topic.”
(Reporting by Balazs Koranyi; Editing by Andrew Heavens)
