Schnabel (ECB) warns against hasty rate cuts as inflation could “explode” | financial markets

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 Schnabel (ECB) warns against hasty rate cuts as inflation could “explode” |  financial markets

The European Central Bank (ECB) should be patient and not rush to adjust its monetary policy as it faces the “final phase” of the ongoing deflation process, when the impact of accumulated rate increases begins to wane. And the financial situation starts getting better. flexible. , because inflation can “explode”.

In an interview with the ‘Financial Times’, Isabelle Schnabel, the German representative on the ECB board, warns of a slowdown in the deflation process, “characterized by the last mile”, in which restrictive monetary policy “has less impact”, once “transmission “The peak” has been controlled.

“In the beginning, we quickly took advantage of deflation, which is the reversal of supply-side shocks,” says Schnabel, for whom inflation has remained roughly stable since then. “I would say that we are now entering an important phase in which the calibration and transmission of monetary policy becomes particularly important because it is about containing second-round effects,” explains German.

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In this sense, the ECB considers the dynamics between executive pay, productivity and profits to be important, because if restrictive monetary policy slows demand, it will be more difficult for companies to pass on higher costs to consumers and they will do so. At least a portion must be absorbed.

However, Schnabel cautions that this “fundamental” process is quite lengthy and quite uncertain during the last mile as the economy may recover more strongly than expected, which could encourage companies to pass the costs back onto consumers.

Similarly, the ECB representative stressed that inflation in services remains subdued while the labor market shows signs of resilience, while “remarkable resilience in financial conditions” could be seen as markets aggressively respond to central banks’ stances. Ignore change. Apart from the Red Sea incidents.

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“It warns against premature adjustment of political stances. “This means we must remain patient and cautious because we also know from historical experience that inflation could rise again,” Schnabel warned. He added, “This is an argument against hastily adjusting political stances.”

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