Cernobbio, Italy, April 3 (BNA): European Central Bank Governing Council member Isabel Schnabel said on Saturday that the European Central Bank plans to raise interest rates some time after ending its bond-buying program in the third quarter of this year.
The European Central Bank’s head of market operations said net asset purchases will end in the third quarter, as long as the data supports expectations that medium-term inflation expectations will not subside, Reuters reports.
“We will raise interest rates for some time, as appropriate, in light of the data received,” Schnabel said at an event in Cernobbio, northern Italy.
Annual consumer price growth reached 7.5% in March, the highest reading ever, as the Russian war in Ukraine pushed up food and fuel prices and left consumers in the West poorer. Read more
“The speed of normalization … will depend on the economic repercussions of the war and the severity and persistence of the inflation shock,” Schnabel said.
The acceleration of price growth leaves the European Central Bank, and central banks in other major economies in a severe political dilemma.
Inflation itself would justify a monetary tightening, especially since record low unemployment rates portend higher wages, the precondition for permanent inflation.
But tightening policy now could collapse an economy already nearing recession as the war in Ukraine erodes consumers’ purchasing power and lowers business investment.
However, Schnabel said inflation risks are skewed towards higher readings given the sharp rise in producer prices, structural economic changes such as declining globalization and the prospect of higher wages.
She said that the ECB’s mandate is price stability, so it should prioritize this in the face of high inflation while governments can support economic growth through targeted fiscal measures, and avoid excessively expansionary policies that would complicate the bank’s task.
“A central bank seen as committed to protecting its mandate can contain inflation at a lower economic cost” by lowering inflation expectations, she said.
The European Central Bank will then meet on April 14th. At its last meeting, it decided to end bond purchases in the third quarter but made no further policy commitments, arguing that policy should remain flexible.
The US Federal Reserve and the Bank of England have begun to tighten monetary policy.