European Central Bank (ECB) board member Isabel Schnabel said the central bank may cut interest rates in June, but advocated caution about further cuts in borrowing costs given uncertainty over the outlook, Japan’s Nikkei newspaper has reported.
The ECB left interest rates unchanged last month but made clear that its next move will be a cut, most likely on June 6th, provided wage and inflation data stay on their current, relatively benign path.
“Depending on the incoming data and our new Eurosystem staff projections, a rate cut in June may be appropriate,” Ms Schnabel said in an interview with Nikkei in Frankfurt.
“But the path beyond June is much more uncertain. Recent data have confirmed that the last mile of disinflation is the most difficult,” she said.
After many years of “very high” inflation and with price risks still tilted to the upside, pushing forward the timing of rate cuts would risk easing monetary policy prematurely, she said.
“Further progress in inflation and especially domestic inflation, which is proving stickier, is needed to foster our confidence that inflation is going to sustainably return to our 2 per cent target in 2025 at the latest,” Ms Schnabel was quoted as saying.
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Ms Schnabel said the ECB could not pre-commit to any particular rate path because of “very high uncertainty” over the outlook for inflation.
“We should move cautiously. We should look very carefully at the data because there is a risk of easing prematurely,” she said, when asked whether the ECB should move slowly in cutting rates beyond summer, according to the Nikkei.
Ms Schnabel, however, said geopolitical shocks such as from the escalating tension in the Middle East could pose upside risks to the inflation outlook.
“Over the longer run, geopolitical fragmentation would pose further upside risks to inflation by reducing the efficiency and reliability of global supply chains,” she said.
[ Latest euro zone inflation figures suggest ECB will move slowly on ratesOpens in new window ]
She declined to comment when asked about Japan's suspected recent currency intervention to prop up the yen, the Nikkei said.
Prospects that Japanese interest rates will stay well below those of the United States had pushed the yen to a 34-year low of 160.245 to the dollar on April 29, triggering suspected yen-buying intervention by Japanese authorities.
Ms Schnabel said she “wouldn’t overstate the narrative of monetary policy divergence”, when asked whether the likelihood of the ECB cutting interest rates before its U.S. counterpart could affect the currency market.
“Since the beginning of the year, four rate cuts have been priced out for the U.S. and three rate cuts for the euro area,” she said.
“The correlation of policy expectations across the two countries remains high in historical comparison. This has been reflected in rather contained exchange rate movements of the euro against the U.S. dollar since the start of the year,” Ms Schnabel said. – Reuters
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