Schnabel (ECB) warns against a hasty rate cut because inflation could "explode"

MADRID, 7 Feb.

Schnabel (ECB) warns against a hasty rate cut because inflation could "explode"


The European Central Bank (ECB) must be patient and not rush to adjust its monetary policy as it faces the "last mile" of the ongoing disinflationary process, when the accumulated rate increases begin to have a minor impact and financial conditions begin to become more flexible. , because inflation could "explode."

In an interview with 'Financial Times', the German representative on the ECB board, Isabel Schnabel, warns of a slowdown in the disinflationary process, "typical of the last mile", in which restrictive monetary policy "has less impact" , once "the transmission peak" has been surpassed.

"Initially, we reaped the rapid benefits of disinflation, which is the reversal of supply-side shocks," says Schnabel, for whom inflation has remained virtually stable since then.

"I would say that we are now entering a critical phase in which the calibration and transmission of monetary policy become especially important because what it is about is containing the second round effects," explains the German.

In this sense, the ECB executive considers the dynamic between salaries, productivity and profits to be key, since if demand is slowed by a restrictive monetary policy, it will be much more difficult for companies to pass on the higher costs to consumers and they will have to absorb at least a part.

However, Schnabel warns that this "fundamental" process during the last mile is quite prolonged and quite uncertain because the economy could recover more strongly than expected, which could encourage companies to pass costs back to consumers.

Likewise, the representative of the ECB emphasizes that inflation persists in services while the labor market offers signs of resilience, while "a notable flexibility in financial conditions" can be seen because the markets aggressively discount a change in the stance of the central banks, in addition to the Red Sea events.

"This warns against an early adjustment of the political stance. It means that we must be patient and cautious because we know, also from historical experience, that inflation can break out again," warns Schnabel. "This is an argument against hastily adjusting the political stance," she adds.