Interest rates need to reach ‘restrictive’ level, says ECB official

European Central Bank (ECB) Executive Board member Isabel Schnabel says interest rates will have to move into "restrictive territory” to bring inflation back to target. The danger of a policy overreaction by the ECB "continues to be limited, as real interest rates are still very low,” Schnabel said in an interview with Frankfurter Allgemeine Zeitung conducted on December 16, a day after the central bank’s most recent policy meeting, and posted on Saturday.Reflecting on the ECB’s string of four interest rate hikes, Schnabel said the central bank is doing "whatever is necessary” to bring inflation back to 2%. She echoed the position of ECB President Christine Lagarde, who has said rate increases will continue "for a period of time.” "According to our assessment, this interest rate lies in restrictive territory – that is, above the neutral interest rate – even if the exact level is yet unknown,” Schabel said. With the central bank now pointing to a terminal rate higher than many market participants had expected, "achieving consensus” on the next steps "will certainly not get any easier,” Schabel said. The Germany policy-maker said the ECB underestimated the persistence of inflation earlier, "and initially did not take the signs of higher inflation seriously enough” as it pivoted from a phase where too-low inflation had been the main risk and pandemic-related uncertainty shadowed policy decisions. "There was a concern that premature action by monetary policy might unnecessarily push the economy into another recession,” she said. "Many people” underestimated the surge in prices as Covid-19 measures faded, Schnabel said. "They thought that the supply chain disruptions would be resolved more quickly. But that took much longer than expected.”ECB projections anticipate inflation "notably” above 2% over an extended period likely to run into 2025. "A long phase of very high inflation – as we are currently seeing – is therefore problematic. It makes it all the more important for us to react decisively,” said Schabel. "With inflation at times exceeding 10%, we can hardly speak of price stability.” Also on Saturday, ECB Governing Council member Pierre Wunsch told the Belgian newspaper L’Echo that "the consensus is very clear” within the central bank: "We have a long way to go before we have a monetary policy that is tight enough to ensure that we get back to our 2% inflation target fairly quickly.”"I’m very comfortable with the message that Christine Lagarde gave, which reflects very well the thinking of the vast majority of the Board, that we should expect several more rate hikes,” he added. Schnabel told FAZ that said she expects "increasing pushback” to rate increases of the kind recently seen from Italy. "Governments generally don’t like interest rate hikes very much,” Schabel said. "They weigh on the fiscal position as it becomes more expensive for states to issue new debt.” The ECB "can expect increasing pushback and we need to withstand it. That’s exactly why central banks are independent,” she said.Meanwhile traders are paying heed to a growing chorus of European Central Bank policy makers calling for interest rates to rise faster to get a grip on double-digit inflation. Money markets are wagering the deposit rate will increase to 3.5% by July, according to swaps tied to policy meeting dates. That implied peak has moved 60 basis points higher since the ECB’s last decision on December 15, when it increased rates to 2%, and would leave official borrowing costs at the highest since 2001. ECB President Christine Lagarde followed up on the fourth successive rate increase last week with a warning to investors to prepare for a long-running campaign of similar moves. Fellow policy maker Yannis Stournaras was the latest to voice his view that the rate could rise a further one percentage point to 3% by March, which compares to 94 basis points currently priced.