FRANKFURT (Reuters) – The European Central Bank (ECB) may rule out further rate hikes given the “remarkable” fall in inflation, and monetary policy makers are unlikely to frame rates as remaining stable after mid-2024, ECB Governing Council member Isabel Schnabel told Reuters.

These comments are a real change of foot for Isabel Schnabel, considered the most influential voice of the “hawks” advocating a more restrictive monetary policy, and who have taken ECB rates to their highest historical level.

Inflation in the euro zone fell to 2.4% last month, from above 10% a year earlier, and the ECB’s 2% target is now achievable. The risks, mentioned by some monetary policy makers, that inflation will remain persistent for the next two years, now seem exaggerated.

Isabel Schnabel, who pointed out just a month ago that further rate hikes could take place, with the “last mile” of the fight against inflation being the most difficult, said that the last three inflation indicators in withdrawal had made him change his mind.

“When the facts change, I change my mind,” Isabel Schnabel said in an interview, repeating a quip often attributed to John Maynard Keynes, and adding that “the latest inflation number made another rise in rather improbable interest rate.

Isabel Schnabel also warned against too prospective a framing, given the rapid evolution of inflation figures and which surprise those responsible for monetary policy, both downwards and upwards.

Christine Lagarde, president of the ECB, François Villeroy de Galhau, governor of the Bank of France, and Yannis Stournaras, governor of the Bank of Greece, all said that rates would remain stable for the “few” quarters to come, even if the Markets expect a rate cut in early spring.

“We have been surprised many times both up and down,” said Isabel Schnabel. “So we should be careful when we make statements about something that will happen in six months.”

The German Isabel Schnabel is the first of the ECB hawks to have changed their point of view. Joachim Nagel, head of the Bundesbank, said that the November data had not changed his mind and that a rate hike remained possible.

CAUTION

Swaps markets predict more than five reductions in the ECB’s key rate in 2024, with the first expected as early as March.

“Central banks are more cautious and I would say they need to be,” said Isabel Schnabel. “After more than two years of above-target inflation, we need to be cautious.”

The faster-than-expected decline in core inflation, which excludes volatile food and energy prices, is behind the cautious optimism.

“It’s quite remarkable,” said Isabel Schnabel. “Recent inflation figures have reassured me that we can return to 2% by 2025 at the latest.”

But the fight against inflation is not yet won, she added, and progress is still needed on core inflation and wage growth. The ECB is also awaiting confirmation that corporate profit margins continue to decline.

A pick-up in inflation is expected, warned Isabel Schnabel, as some budgetary subsidies will expire, while base effects on energy prices will fade.

“We must not declare victory over inflation prematurely,” she said. “We are on the right track, but we must remain vigilant.”

Isabel Schnabel said slowing growth, linked to more restrictive monetary policy, was helping to combat inflation, but a deep or prolonged recession was unlikely given the results of the latest activity surveys.

Asked about an early end to reinvestments from the ECB’s Pandemic Emergency Purchase Program (PEPP), which totals 1.7 trillion euros, Isabel Schnabel recalled that the volumes of reinvestments were low and that the markets were anticipating their termination eventually, so the decision was “not that important”.

European yields welcomed the Governing Council member’s statements.

At 08:55 GMT, the German ten-year yield fell four basis points to 2.308%, while the two-year yield fell 4.5 bps to 2.634%.

(Report by Balazs Koranyi, Corentin Chappron, edited by Blandine Hénault)

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