ECB Inflation Task Requires Restrictive Rates, Schnabel Says

Lucy White, Bloomberg News

Fresh produce for sale at a fruit and vegetables stall in a bio-food market in Berlin, Germany, on Wednesday, March 1, 2023. German inflation surprisingly accelerated in February, further complicating the European Central Bank's task after overshoots this week in other parts of the continent. Photographer: Krisztian Bocsi/Bloomberg , Bloomberg

(Bloomberg) -- The European Central Bank can keep raising rates to a “sufficiently restrictive level” without worrying about financial stability, according to Executive Board member Isabel Schnabel.

“The ECB can continue to do whatever is needed to bring inflation back to our 2% target in a timely manner,” she said in a speech in London on Friday. “This implies raising rates to a sufficiently restrictive level and keeping them at that level for as long as necessary.”

The recent banking crisis in the US and Switzerland has reminded central banks of the difficulty of maintaining both price and financial stability. ECB chief Christine Lagarde and her colleagues have repeatedly insisted that there’s no conflict between those goals.

“Given the resilience of euro area banks, President Lagarde rightly stresses that there is no trade-off between price stability and financial stability,” Schnabel said. “The ECB has the tools to provide liquidity to the euro area financial system, if needed to preserve financial stability and a smooth transmission of monetary policy.”

The ECB is nearing the home stretch of its current tightening cycle, having increased borrowing costs by 375 basis points since July. Another two quarter-point moves are likely at upcoming meetings and some policymakers are suggesting another such step might be needed in September.

“There’s more that has to be done, as our president says there’s more ground to cover,” said Schnabel, who is among the ECB’s more hawkish policymakers. “So we still have to raise rates more — and stay also at a high level probably for quite some time.”

Money markets have assigned almost a 100% probability of another quarter-point rate hike next month and see the deposit rate peaking above 3.75% by September. The first 25 basis point cut is expected by May next year.

Schnabel said that rather than seeing a clash in the priorities of price and financial stability, the onus is on officials to ensure that no such conflict arises.

“A sound financial regulation and supervision are the best protection against financial dominance, just as a functioning fiscal framework is needed to protect against fiscal dominance,” she said. “This speaks in favor of maintaining or strengthening macroprudential capital buffers, being cautious on profit distributions and share buy-backs, and closing regulatory gaps including by fully implementing the Basel III reforms.”

Earlier on Friday, Bloomberg reported that the ECB is stepping up scrutiny of lenders’ liquidity reserves and may communicate stricter requirements to individual firms later this year. The ECB’s annual review of risks faced by banks will likely pay more attention to the management of liquid funds, including the potential for a higher bar on key metrics such as the liquidity coverage ratio, said people familiar with the matter.

--With assistance from James Hirai.

(Updates with Schnabel comments on rate hikes in sixth paragraph, markets in seventh.)