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ECB Director Schnabel: European rate hike in summer?

Status: 05/04/2022 11:27

The ECB had hesitated for a long time. Now he finally wants to act. Given high inflation, German board representative Schnabel supports a rate hike in July.

Fear is rampant in the ECB tower in Frankfurt, of a wage-price spiral and stagflation, or a fatal mixture of high inflation and recession. “Many fear that there will now be a stagflation,” said ECB director Isabel Schnabel in an interview with “Handelsblatt”. Especially when the war in Ukraine escalates.

“Seeing a widening of inflationary pressures”

After Germany’s top representative on the ECB’s Governing Council has long seemed less critical of the dangers of inflation, she now expresses concern about rising consumer prices, which are no longer limited to energy and food. Core inflation, which does not include energy and food, has risen significantly and is now at 3.5%. “We see inflationary pressures widening,” warns Schnabel.

He fears a wage-price spiral. There is no doubt that higher wage demands would come if inflation remained high for a longer period, says Schnabel. That is why “we must avoid high inflation taking hold in expectations,” he points out.

“We must act”

“Now it is not enough to talk, we must act”, said Schnabel in an interview with “Handelsblatt”. In particular: interest rates are expected to be raised in the summer. “From today’s point of view, I think a rate hike in July is possible,” explains the director of the ECB. Before then, net bond purchases are expected to be suspended, probably in late June.

It would be the first interest rate hike in the euro area since 2011. By that time, monetary watchdogs had raised the benchmark interest rate slightly, but quickly corrected the pace. During the Crown crisis, the ECB then reduced the benchmark interest rate to zero percent.

Record inflation puts pressure on the ECB

With inflation on the rise, which hit a record 7.5% in the eurozone in April, the pressure on the ECB is mounting. In recent weeks, many economists and politicians have urged the central bank to finally raise interest rates. So far, ECB head Christine Lagarde has resisted and said she wanted to wait for more data.

“So far the ECB has defiantly refused to accept the new reality,” criticizes the former president of the Ifo Institute, Hans-Werner Sinn. With their flimsy claims they not only risk their credibility, they also give the impression that they have lost control over the price level.

Recently, however, some central bankers have pushed forward to act quickly. The head of the Austrian central bank, Robert Holzmann, has come out in favor of up to three interest rate hikes this year. Bundesbank head Joachim Nagel is also calling for interest rate hikes in the near future.

In the US, the turnaround in interest rates has already begun

Other central banks have long reacted to runaway inflation. The Fed raised interest rates a few weeks ago and is planning further steps. Interest rates are expected to rise by 0.5 percentage points today. The UK central bank also announced a turnaround in interest rates.

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