ECB’s Leading Hawk Adjusts Stance with Optimistic Inflation Outlook By Reuters

Frankfurt – Eurozone inflation appears to be trending towards the European Central Bank’s 2% target, according to ECB board member Isabel Schnabel. This statement suggests a shift in her previously cautious stance on controlling price growth, potentially enhancing speculation regarding interest rate cuts.

Inflation dipped below 2% last month, and the 20-nation currency region is avoiding recession, prompting markets to anticipate that the ECB will accelerate interest rate reductions, with the next decision expected on October 17.

Schnabel, known for her conservative views within the central bank, is likely to strengthen these market expectations and support predictions for subsequent moves in December. In a speech delivered in Freiburg, Germany, she acknowledged the challenges to economic growth.

"We cannot ignore the headwinds to growth," Schnabel noted. "With signs of softening labor demand and further progress in disinflation, a sustainable return to our 2% target is becoming more likely, despite ongoing elevated services inflation and strong wage growth."

Markets currently forecast a roughly 90% probability of a 25 basis point reduction in the 3.5% deposit rate later this month, following cuts made in June and September.

While Schnabel expressed increased confidence regarding inflation, Portuguese central bank chief Mario Centeno, a more dovish figure on the Governing Council, raised concerns about the risk of undershooting the inflation target—a significant issue prior to the pandemic.

"Now we face a new risk: undershooting target inflation, which could stifle economic growth," Centeno stated. "Fewer jobs and reduced investment would add to the sacrifice already endured. A sluggish economy would reinforce inflation undershooting in a vicious cycle."

However, Schnabel aimed to manage expectations, emphasizing that the ECB’s influence is limited. She stated that Europe’s economic challenges are deeply rooted and that simply lowering rates will not resolve these issues.

"Monetary policy is no panacea. It cannot address structural problems," she said.

The central challenge lies with Germany, the largest economy in the eurozone, which is currently grappling with significant difficulties. Its export-driven, industry-focused economy is facing more persistent challenges.

Geopolitical tensions are hampering trade, rising energy costs are impacting competitiveness, and high-value production from China is eroding market share, Schnabel noted.

She concluded by asserting that Europe, particularly Germany, needs a new industrial policy that prioritizes innovation and entrepreneurship, areas where it has lagged for many years.