by Leika Kihara and Satoshi Sugiyama
TOKYO (Reuters) – Isabel Schnabel, a member of the board of governors of the European Central Bank, believes that the ECB could lower its key rates in June but she advocates caution beyond this deadline due to uncertainties over the outlook for inflation, the Japanese economic and financial daily Nikkei reported on Friday.
The ECB left rates unchanged last month, but made clear it would cut borrowing costs this year, most likely after its June 6 meeting, if wage data and inflation remained on their current trajectory, which is relatively benign.
“Depending on the data received and new projections from Eurosystem services, a rate cut in June could be appropriate,” Isabel Schnabel said in an interview with Nikkei in Frankfurt and published on the newspaper’s website on Friday.
“But the trajectory beyond June is much more uncertain. Recent data has confirmed that the last stage of disinflation is the most difficult,” she added.
After several years of “very high” inflation and while price risks are still on the rise, bringing forward the timetable for rate reductions would risk prematurely easing monetary policy, she argued.
“Further progress on inflation, and in particular on domestic inflation, which is proving more difficult to control, is necessary to strengthen our confidence in a sustainable return of inflation to our objective of 2% in 2025 at the latest,” she continued.
According to Isabel Schnabel, the ECB cannot commit in advance to a specific rate trajectory due to the “very high uncertainty” regarding the inflation outlook.
“We have to act cautiously. We have to look very carefully at the data because there is a risk of premature easing,” she said, responding to a question about the pace of the ECB’s rate cut. this summer, specifies the Nikkei.
Isabel Schnabel also noted that geopolitical shocks, such as worsening tensions in the Middle East, could pose a threat to the inflation outlook.
“Longer term, geopolitical fragmentation would pose additional risks to inflation by reducing the efficiency and reliability of global supply chains,” she said.
On the bond markets in the euro zone, the yield on the ten-year German Bund rose by four basis points on Friday, to 2.482%.
Markets now expect the ECB to cut rates by 68 basis points (bps) in 2024, compared to a reduction of 72 points on Thursday.
Asked for a comment on the yen, the market suspecting the Japanese authorities of having recently intervened to support their currency, Isabel Schnabel refused to comment, according to the Nikkei.
The prospect that Japanese interest rates will remain well below those of the United States pushed the yen to a 34-year low of 160.245 per dollar on April 29.
Asked about the impact on the currency market of a probable cut in ECB rates before those of the Fed, Isabel Schnabel said that we should not “exaggerate the importance of the divergence of monetary policies”.
“Since the start of the year, four rate cuts have been anticipated for the United States and three for the euro zone,” she recalled.
“The correlation of monetary policy expectations in the two blocs remains high by historical standards. This has resulted in rather limited exchange rate movements of the euro against the US dollar since the start of the “year,” she noted.
(Reporting Leika Kihara and Satoshi Sugiyama; French version Claude Chendjou, editing by Kate Entringer)
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