European Central Bank (ECB) Executive Board member Isabel Schnabel said that inflation is unlikely to return to target over the medium term, and therefore further tightening will be necessary, Bloomberg reported on Wednesday.
Key quotes
The ECB must prevent second-round effects early on.
Market seems to understand ECB reaction function well.
Extent of tightening to depend on incoming data.
Natural gas situation particularly concerning.
Economy looks to be gaining further momentum.
Inflation likely to top 2% for extended period.
Market reaction
There seems to be no immediate impact of the ECB Schnabel’s comments on the Euro (EUR). At press time, EUR/USD trades lower at around 1.1665 as the US Dollar (USD) edges higher.
Schnabel underscores data-dependent tightening as inflation risks persist
The FXS Speechtracker score of 7/10 is slightly below Schnabel’s historic average of 7.2/10, pointing to a broadly consistent but marginally less forceful tone. Emphasis that the ECB must prevent second-round effects early on, alongside concern over the natural gas situation and inflation likely above 2% for an extended period, tilts the speech in a hawkish direction despite acknowledging that the economy looks to be gaining further momentum.
The remark that the extent of tightening will depend on incoming data reinforces a data-dependent reaction function that markets seem to understand well, supporting expectations for further action if inflation pressures persist. Overall, the combination of prolonged inflation risks and energy concerns backs a hawkish bias, even as the slightly lower FXS Speechtracker score suggests no major escalation versus Schnabel’s usual stance.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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