She said Member of the Executive Board of the European Central Bank, Isabel Schnabel Even if inflation is lower than expected, lowering interest rates may prove unproductive if underlying economic problems cause the decline.
“In such a situation, the costs of moving to an easing zone may be higher than the benefits,” Schnabel added. “We will use the valuable policy space that will be needed in the future, when the economy faces shocks that monetary policy can deal with more effectively.”
Regarding growth, Schnabel downplayed the importance of the sudden decline in private sector activity this month, citing the growing uncertainty caused by political problems in Europe and Trump’s election victory in the United States. She said that the numbers may overestimate the extent of the weakness.
She continued: “In conjunction with the strict data, surveys indicate that the euro area economy is still stagnant,” adding that she does not see the risk of recession at the present time.. “Consumption in the third quarter, as far as we can tell on the basis of available data, was stronger than “Expectedly, we see some evidence of a consumption-driven recovery in the data. This gives me confidence that this narrative is still plausible.”
That view contrasts with last week’s assessment of the outlook by Italian Central Bank Governor Fabio Panetta, who urged greater focus on the “real economic slowdown” and said interest rates were probably “very far” from neutral. He believes politics may have to become expansionary — even if others see such talk as premature.
There is growing evidence that the impact of the ECB’s tightening campaign is “clearly fading”, according to Schnabel. She said a recent survey showed that most banks no longer believe interest rates are holding back demand for loans and the housing sector appears to have bottomed out.
While the neutral rate may be higher than it was before the pandemic, “we’re also in a very different world,” Schnabel said.
“We have much higher public debt, greater fragmentation and significant investment needs to address the challenges we face,” she said. “We also have a potential productivity boost from the AI revolution.”
