Interview with ARD Plusminus und tagesschau.de

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Steffen Clement on 16 May 2024

24 May 2024

On 6 June the Governing Council of the European Central Bank (ECB) will next decide on the level of interest rates. Will it be the beginning of a rate turnaround?

Every decision is made on the day of the Governing Council meeting on the basis of all the information available at the time. There are still quite a lot of data we haven’t received yet. So the decision won’t be made until the day the Governing Council meets. If the inflation outlook and the new data give us confidence that inflation will sustainably converge towards our target of 2%, a rate cut in June will be likely.

What impact do you expect on savers and borrowers?

When a rate cut is widely expected, market prices adjust in advance. This means that when an interest rate decision meets general expectations, probably nothing will change because the move has been priced in already. If you take out a mortgage today, you will already pay a lower rate of interest than a few months ago. This is because market participants have been expecting a rate cut in June for a while now.

Should an interest rate turnaround come, will there be further rate cuts in the coming months?

We are satisfied with the noticeable decline in inflation, but the path back towards price stability is bumpy. We see that some elements of inflation are proving persistent – especially domestic inflation, and services in particular. We are monitoring the situation closely and ought to give ourselves sufficient time. I would caution against moving too quickly because there is a risk of cutting interest rates too fast. And we should definitely avoid that.

Inflation keeps falling. How much of this is thanks to the ECB?

In October 2022 inflation in the euro area reached its peak of 10.6%. Since then, inflation has fallen to 2.4%, which is indeed very good news. Of course, this is not all thanks to the ECB’s monetary policy. Some of the factors driving prices up have reversed, particularly when it comes to energy prices. Monetary policy has little impact on that. At the same time, however, the rising interest rates dampened loan growth, which helped to lower inflation for goods and services.

Interest rate hikes typically weigh on economic activity. What is your initial assessment?

We are now seeing a gradual recovery of the euro area economy. At the same time, inflation continues to decline. This justifies the hope that we may succeed in returning to price stability without a recession. However, last year’s economic performance was weak; we had a stagnation. That partly reflects structural factors, though, such as prolonged higher energy prices or stronger competition from China.

As early as the 1970s, central banks initially managed to reduce the inflation rate by raising interest rates. But then inflation started to rise again. What conclusions do you draw from that?

We should certainly be cautious and closely monitor the data so that we can detect quickly if inflation is not evolving as expected. However, the risk of a wage-price spiral is lower today than it was in the 1970s. Today’s central banks enjoy far greater credibility and there is less automatic adjustment of wages to inflation. In this respect, I don’t think the current situation can be compared to the 1970s.

But the trade unions are able to achieve strong wage increases. Is a wage-price spiral looming?

It is our main goal to avoid such a wage-price spiral, in other words, mutually reinforcing upward adjustments of wages and prices. This depends, on the one hand, on wage growth and, on the other hand, on the extent to which firms pass on their higher wage costs to consumers. We are monitoring this closely. In the current situation we have seen strong wage increases, but wage growth is gradually slowing down. This is in line with our projections. We are therefore confident that we will return to our inflation target of 2% in 2025.

At some point this inflation target was a long way off.

A key reason why we succeeded in stabilising inflation is that we managed to stabilise inflation expectations. This means that although inflation reached double digits, people continued to trust us to bring inflation back to the target of 2%. We should not disappoint this trust.