Isabel Schnabel, a board member at the European Central Bank (ECB), hinted towards a potential trimming of interest rates in June, but highlighted the need for vigilance in light of the unpredictable macroeconomic climate, as stated in an interview reported by Japan’s Nikkei newspaper.
Despite not adjusting interest rates in the previous month, the ECB has hinted that it would likely lower them on the 6th of June, assuming that wage and inflation figures remain largely favourable.
According to Ms Schnabel, a June rate cut could be deemed suitable depending on incoming financial data and projections from the new Eurosystem staff. However, she observed that the path after June is less clear due to the challenge in the final phase of disinflation.
Schnabel warned against hastening decisions on rate cuts citing years of very high inflation and continued upward price risks. This premature ease of fiscal policy could be risky, she noted.
She emphasized the need for continued inflation improvement, focusing on domestic inflation, which remains high, to boost their confidence in achieving their inflation goal of 2% by 2025 at the latest.
Schnabel remarked that, given the high level of uncertainty in the inflation forecast, the ECB could not bind itself to any specific interest rate trajectory. She advised for a cautious approach and careful evaluation of the data to avoid premature easing.
The ECB board member pointed out that geopolitical disturbances such as escalating tensions in the Middle East could increase inflation risks. She further explained that long-term geopolitical fragmentation could risk inflation further by affecting the productivity and reliability of international supply chains.
When asked about Japan’s suspected recent actions to support the yen by intervening in currency markets, Schnabel declined to comment, Nikkei reported.
Anticipations of Japan maintaining interest rates significantly lower than the United States caused the yen to reach its lowest point in 34 years, falling to 160.245 against the dollar on 29th April. This prompted alleged intervention from Japanese authorities to boost yen purchases.
Ms Schnabel, when questioned about the potential effects on the currency market due to the European Central Bank (ECB) possibly reducing interest rates before its United States counterpart, cautioned against overstating the impact of divergent monetary policies.
From the start of this year, the market had anticipated four rate cuts from the U.S. and three from the euro area, she noted. According to her, the mutual expectations of policy remain strong between these two regions when compared historically. This was shown in the relatively stable exchange rate movements of the euro against the U.S. dollar since the beginning of the year, Ms Schnabel said. – Reuters
(c) Copyright Thomson Reuters 2024.