BIX ARTICLE
ECB hawk Schnabel takes rate hike off table after 'remarkable' inflation drop
Dec 06, 2023
|
5 min read
Featured Posts
SRI Sukuk: The Journey Towards Sustainable and Responsible Investment
Jul 23, 2020
|
5 min read
Securities Commission's Capital Market Masterplan 3 (CMP3)
Sep 21, 2021
|
2 min read
What If We Allowed Retail Investors to Directly Invest in Malaysia’s Government Bond?
Aug 24, 2021
|
8 min read
Islamic Bonds Come Under Microscope After Garuda Indonesia Default
Aug 19, 2021
|
8 min read
FRANKFURT (Dec 5): The European Central Bank can take further interest rate hikes off the table given a "remarkable" fall in inflation and policymakers should not guide for rates to remain steady through mid-2024, ECB board member Isabel Schnabel told Reuters.
The comments mark a dovish shift for Schnabel, seen as the most influential voice in the conservative camp of policymakers, and drove up rate cut expectations on Tuesday as investors now expect the ECB to reverse the steepest increase in interest rates in the bank's quarter century history.
Euro zone inflation tumbled to 2.4% last month, from above 10% a year earlier, after 10 straight rate hikes. That has put the ECB's 2% inflation target within sight and raised some doubts about policymakers' warnings that another two years of stubborn price growth may be ahead.
Schnabel, who had insisted just a month ago that rate hikes must remain an option because the "last mile" of the inflation fight may be the toughest, said she had shifted stance after three unexpectedly benign inflation readings in a row.
"When the facts change, I change my mind. What do you do, sir?" Schnabel said in an interview, repeating a quip often attributed to John Maynard Keynes. "The most recent inflation number has made a further rate increase rather unlikely."
Following Schnabel's comments, investors were betting on 142 basis points of rate cuts next year, up from 130 basis points a day earlier, with the first move now seen as soon as March.
Bond yields also tumbled with German 10-year papers hitting 2.28%, their lowest levels since June, as bets for an ECB policy reversal solidified.
Schnabel also warned against guiding markets on interest rate moves too far ahead, given rapidly changing inflation figures that are surprising policymakers on the way down, as they did on the way up.
ECB president Christine Lagarde, French central bank chief Francois Villeroy de Galhau and Bank of Greece governor Yannis Stournaras have all guided for steady rates for the next "few" or "several" quarters, even as markets see a rate cut in the early spring.
"We have been surprised many times in both directions," Schnabel said. "So we should be careful in making statements about something that is going to happen in six months' time."
Schnabel, a German, is the first of the ECB's policy hawks to signal a shift in view. Her comments come after Bundesbank chief Joachim Nagel said the November data did not change his mind and a rate hike was still a possibility.
Err on the side of caution
Schnabel acknowledged the rapid shift in rate cut pricing but pushed back more modestly than some of her colleagues.
"Central banks are more cautious and I would argue they have to be more cautious," she said. "After more than two years of above-target inflation, we need to err on the side of caution."
Overall price growth was always expected to drop quickly through the autumn but the rapid decline in underlying inflation, which strips out volatile food and energy prices, is underpinning the guarded optimism.
"This is quite remarkable," Schnabel said. "The recent inflation print has given me more confidence that we will be able to come back to 2% no later than 2025."
But the inflation fight has not yet been won, she said, with more progress needed on underlying inflation and slower wage growth. The ECB is also awaiting data to see if company profit margins continue to shrink.
An uptick in price growth is still coming, Schnabel warned, as some budget subsidies expire and high energy prices get knocked out from year-earlier figures, so the rapid drop may be over for now.
"We must not declare victory over inflation prematurely," she said. "We are on track but we need to remain vigilant."
Schnabel said weak growth as a result of the ECB's rate hikes is helping the inflation fight but that a deep or prolonged recession is unlikely, with recent survey data supporting expectations for a recovery.
Weighing in on a debate about whether the ECB should make an early stop to reinvestments in its 1.7 trillion Pandemic Emergency Purchase Programme, Schnabel argued that purchase volumes were low and markets anticipate an eventual end, so the decision was "not such a big deal".
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.
The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
YOU MAY ALSO LIKE
ARTICLE
May 06, 2024
|
4 min read
ARTICLE
May 02, 2024
|
6 min read
ARTICLE
Mar 05, 2024
|
3 min read
ARTICLE
Feb 07, 2024
|
3 min read