By Marc Jones and David Milliken<\/p>\n
LONDON, May 7 (Reuters) – One of the European Central Bank’s top policymakers warned on Thursday of the rising risk of higher inflation in the wake of the Iran war and of the “quiet \u200cerosion” of central bank independence at a difficult moment of rising global debt.<\/p>\n
ECB Executive Board member Isabel Schnabel bolstered expectations \u200cthat the bank could raise euro zone interest rates as soon as next month, saying companies and households were now reacting in a concerning way to surging \u200bglobal energy prices.<\/p>\n
The German policymaker pointed to a growing share of euro zone companies planning to increase their prices despite subdued demand, while households have also raised their inflation expectations.<\/p>\n
“If the energy price shock broadens, monetary policy will need to tighten to contain the risk of second-round effects threatening medium-term price stability,” she told an audience in London. “This risk has increased in recent weeks.”<\/p>\n
Schnabel went so far as to say \u200cthe surge in fuel prices may feed through \u2060the economy faster than during the last inflation surge in 2021-22 because “memories of that painful inflation episode are still fresh”.<\/p>\n
Financial markets currently price in three or, more likely, four ECB rate hikes over the next \u206012 months, which would lift the ECB’s key deposit rate to 2.75%-3% from its current 2% level.<\/p>\n
CENTRAL BANK INDEPENDENCE FACES THREATS<\/p>\n
The core topic of Schnabel’s speech was that political attacks on central bank independence risk doing lasting damage by sowing doubts about their ability to act freely, thereby \u200bweakening the \u200banchor underpinning long-term inflation expectations.<\/p>\n
What makes the current moment “particularly concerning”, she added, \u200bis that the political pressures come as rising government \u200cdebt risks creating a tension between price stability and fiscal sustainability “giving rise to fiscal dominance”.<\/p>\n
Schnabel also appealed to governments and lawmakers to do their part in taming inflation, urging them to put public debt on a sustainable footing and to preserve the key regulations put in place after the financial crisis.<\/p>\n
“The alternative \u2013 allowing fiscal and financial dominance to quietly erode the space for monetary policy amid blurred mandates \u2013 would progressively hollow out independence and ultimately lead to higher inflation and lower growth,” she said.<\/p>\n
Schnabel was joining a host of \u200cfellow rate-setters in backing likely rate hikes, probably as soon as June, to \u200bcounter the ripple effects of the Iran war on consumer prices in the \u200bbloc, which imports most of its fuel.<\/p>\n
The extent to which \u200brising energy prices spread into the wider economy would be key to determining whether and how much \u200cthe ECB raised rates, she said in a question \u200band answer session after her speech.<\/p>\n
“If \u200bwe see that … the higher costs are being passed through … that is then the sign that monetary policy has to react,” Schnabel said.<\/p>\n
Already, households’ inflation expectations had risen, as had businesses’ selling price plans, and waiting to see if higher wages \u200bmaterialised would be leaving things “too late”, she \u200cadded.<\/p>\n
In terms of bolstering central bank independence she said they should “remain within their mandates” to prevent “blurring of the boundary \u200bbetween monetary and fiscal policy” but defended ECB policies to combat climate change, which she said posed an inflation \u200brisk.<\/p>\n
(Writing by Francesco Canepa; Editing by Alex Richardson and Chizu Nomiyama )<\/p>\n","protected":false},"excerpt":{"rendered":"By Marc Jones and David Milliken LONDON, May 7 (Reuters) – One of the European Central Bank’s top…\n","protected":false},"author":2,"featured_media":35624,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2388],"tags":[23480,1858,23385,2802,6339,2518],"class_list":{"0":"post-35623","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-european-central-bank","8":"tag-central-bank-independence","9":"tag-european-central-bank","10":"tag-independence","11":"tag-inflation-expectations","12":"tag-isabel-schnabel","13":"tag-monetary-policy"},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts\/35623","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/comments?post=35623"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/posts\/35623\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/media\/35624"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/media?parent=35623"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/categories?post=35623"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/europe\/wp-json\/wp\/v2\/tags?post=35623"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}