The European Central Bank will probably need to raise interest rates to a level that weakens growth to curb high inflation that is at a growing risk of taking hold in the euro zone, ECB board member Isabel Schnabel said.
With euro zone inflation running in double digits, the ECB has been raising rates at a record pace even as the euro zone economy heads for recession.
This has prompted some policymakers to weigh the benefits of future increases against the risk to growth.
But Schnabel, the leader among ECB hawks who favour higher borrowing costs, said the central bank should press ahead, likely reaching “restrictive territory”, or a level of rates that curbs economic growth.
“There is no time for monetary policy to pause,” Schnabel told an audience at the Bank of Slovenia.
“We will need to raise rates further, probably into restrictive territory.”
The ECB’s deposit rate now stands at 1.5% and economists estimate that the neutral level, which is neither restrictive nor stimulative, is somewhere between 1.5% and 2%.
Schnabel pointed to a number of indicators suggesting high price-growth was at risk of becoming entrenched, such as rising wages and so called underlying inflation, which strips out the most volatile prices, but also market and consumer expectations.
This meant that a shallow recession was unlikely to bring inflation down to the ECB’s 2% target.
“Only a deep recession with a sharp rise in unemployment could be expected to significantly dampen inflation pressure,” she said at the event. “This is currently unlikely, not least due to the robust labour market, large excess savings and the massive fiscal support.”
