Isabel Schnabel, an executive director at the European Central Bank, has sought to soothe concerns about an expected increase in German inflation above 3 per cent this year, saying such a rise was unlikely to cause a tightening of monetary policy.
“Our monetary policy strategy is medium-term and that means we look through all of these short-term fluctuations,” Schnabel told broadcaster RTL on Tuesday.
Schnabel was appointed by Berlin to join the ECB’s executive board at the start of 2020. Her comments reflect an intensifying debate inside the central bank about whether it should slow its emergency bond purchases at its next monetary policy meeting on June 10, when it is due to publish updated economic forecasts that are expected to reflect rising growth and inflation expectations.
“If we actually see there was suddenly a very rapid development of inflation, which is really not in evidence at the moment, then of course we would have to adjust our measures and of course we would have to do that gradually,” said Schnabel, a former economics professor at the University of Bonn, in a televised interview.
The improving outlook for the eurozone economy was highlighted by the latest Zew survey of German investors, published on Tuesday. It found confidence had soared well above expectations to a two-decade high, mainly driven by rising expectations about the next six months.
Eurozone inflation has rebounded this year, climbing to 1.6 per cent in April, after turning negative in the final months of last year. The ECB has forecast that price growth will exceed its target of just below 2 per cent this year, before fading next year and remaining below target by 2023.
In March, the ECB decided to conduct bond purchases at a “significantly higher pace” in the second quarter to avoid a sell-off in bond markets pushing up borrowing costs prematurely before a recovery had taken hold.
But the “hawks” on the ECB’s governing council have been urging the central bank to start scaling back its huge bond-buying programme at its June meeting.
Katharina Utermöhl, an economist at Allianz, said this year’s projected rise in German inflation was likely to be temporary but she warned there was “still room to feel panic and you can see that already in the headlines”.
“In the coming weeks we will see a lot of positive surprises in the eurozone data and that will play into the hands of the hawks at the ECB’s meeting in June, when it will be hard not to signal a slowdown in the pace of bond buying,” she said.
Borrowing costs have been rising for eurozone governments in recent weeks from a very low level and analysts expect this to continue as the expected rebound gathers pace, budget deficits remain elevated and the central bank slows its bond purchases.
“Last year asset purchases [by the ECB] exceeded net issuance of sovereign bonds, helping to finance the deficits of Italy or Spain,” said Simon Wells, an economist at HSBC. “But this year and the next, this may no longer be the case, which could put pressure on funding costs.”