FRANKFURT: The European Central Bank is getting closer to a pause in interest cuts since it is no longer clear that policy remains restrictive and energy price surges raise inflation risks, ECB board member Isabel Schnabel told the Financial Times.
The ECB has cut rates five times since last June and markets see another three moves this year given moderating price pressures. But policy hawks like Schnabel have been increasingly vocal about the need for caution.
“We are getting closer to the point where we may have to pause or halt our rate cuts,” the FT quoted Schnabel as saying on Wednesday. “I’m not saying that we’re there yet. But we have to start the discussion.”
Part of the issue is that at 2.75%, the ECB’s deposit rate may no longer be restricting economic activity, even though inflation is not yet back to the 2% target.
The ECB has already removed a reference to wanting to keep policy “restrictive” and this has fuelled a debate on where restriction ends, a hard to define and mostly subjective level.
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“The data are showing that the degree of restriction has come down significantly, up to a point where we can no longer say with confidence that our monetary policy is still restrictive,” Schnabel said.
She maintained that the neutral interest rate, which neither curbs nor stimulates growth, might have even increased in recent years and its upward trend could continue given big structural challenges, such as high debt and the green transformation.
Schnabel also cautioned that a recent rise in natural gas prices could delay the return of inflation to 2%, which was seen in the early part of the second half in the ECB’s last projection.
“I see risks to our inflation outlook as somewhat skewed to the upside,” Schnabel said. “So I would not exclude that inflation comes back to 2% later than we had anticipated.”
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