ECB's Schnabel Says Rate Hike Possible in July, Rates Still Far From Neutral

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By Geoffrey Smith

Investing.com -- Another of the European Central Bank's top executives opened the door to a first interest rate hike in July and warned that more will be necessary to stop inflation becoming entrenched in the Eurozone.

Isabel Schnabel, a member of the ECB's six-person board at its Frankfurt HQ, told the German newspaper Handelsblatt that: "From today’s perspective, a rate increase in July is possible in my view," owing to the fact that inflation has started to spread more broadly through the economy. Core inflation, excluding volatile food and energy prices, rose to 3.5% in April, according to Eurostat.

The ECB has so far been reluctant to tighten monetary policy, as the war in Ukraine has created fresh threats to economic growth just as the pandemic and the related strain on regional supply chains appeared to be receding. Germany said on Wednesday its exports to Russia fell 62% in March, the first full month of the war.

However, Schnabel added her voice to those saying that the central bank needs to shift gears.

"Talking is no longer enough, we need to act," she said, arguing that "there can be no doubt that we will see higher wage demands if inflation remains so high over a prolonged period. We need to prevent high inflation from becoming entrenched in expectations."

Schnabel had been seen as a comparatively dovish German voice when she joined the bank in 2019, providing much-needed support for the ECB in Germany, where its aggressive use of negative interest rates and asset purchases had been widely criticized as punishing savers.

Her interview is the clearest sign yet that her opinions have hardened as inflation has raced to a record high.

Schnabel indicated that further interest rate rises will be needed quickly in order to bring inflation down, referring to studies that suggest the 'neutral' level for ECB is clearly above zero. The ECB's deposit rate, by contrast, stands at -0.5%.

The ECB has said it intends to end its policy of net asset purchases - or quantitative easing - by the end of the quarter. Schnabel kept with the ECB's guidance that rates should only start to rise after that.

The euro edged up 0.2% to $1.0524 by 5 AM ET (0900 GMT), on a morning when Schnabel's comments were overshadowed by the EU's announcement that it will end imports of Russian oil and refined products by the end of the year.