ECB: Hawkish Leaning Interview From Schnabel

Highlights from Schnabel's interview with the FT. It’s a hawkish leaning interview as you might expect from her general stance. Key focus for markets are her comments around the potential for pausing rate cuts. 

• “The more evidence we have that monetary policy is no longer restrictive, the more cautious we have to become because further rate cuts may no longer be appropriate”.
• Highlights the Q4 BLS, which indicated a tightening of credit conditions: “The data are showing that the degree of restriction has come down significantly, up to a point where we can no longer say with confidence that our monetary policy is still restrictive. One of the important data sources in this context is the bank lending survey”.
• Asked on the need for insurance cuts given uncertainty: “I don't see any argument for that at this point, especially as we are getting closer to no longer being restrictive. If anything, we are getting closer to the point where we may have to pause or halt our rate cuts”.
  • However, she said that she would "exclude" a rate hike at this stage.
• “ One of the most interesting features of this tightening cycle is that it has not led to a comparable tightening of broader financial conditions. “
• “Both services inflation and wage growth are still at an uncomfortably high level”.
• On R*: Echoes Executive Board colleagues and the ECB’s heavily caveated neutral report: “The natural rate of interest is an important theoretical concept. But it’s not well-suited to determine the appropriate monetary policy stance”.
  • “If you look at the R* estimates for the third quarter, you see that the range actually goes up all the way to 3%. This is even above the current deposit facility rate of 2.75%”…”The one thing that you do see is that the overall range seems to have moved up over recent years. For me, that is the key point”.