The European Central Bank is contemplating refraining from additional interest rate hikes due to a substantial easing of inflation, with the member of the ECB’s Executive Board Isabelle Schnabel emphasizing that policymakers should not depend on rate stability until mid-2024, as reported by Reuters.
Schnabel's statements signify a shift in stance, given her prior reputation as a representative of the conservative faction of politicians. Her remarks have heightened expectations for a potential rate reduction, with investors now anticipating a cancellation of the ECB's most dramatic rate hike in the bank's quarter-century history.
Euro area inflation declined to 2.4% last month from over 10% a year earlier, casting doubt on the potential for further price increases despite the previous 10 rate hikes. Schnabel mentioned that recent favorable inflation data has altered her perspective on the necessity for additional rate increases.
In response to her comments, investors anticipate a 142-basis point rate cut next year, up from 130 basis points the previous day, with a potential initial step as early as March.
Germany's 10-year bon yield also dropped to 2.28%, its lowest level since June, as expectations of a policy reversal from the ECB gained strength. Schnabel cautioned against excessive rate movements, considering the rapidly fluctuating inflation figures in both directions.
Despite market expectations of a rate cut in early spring, political leaders, including ECB President Christine Lagarde and the Governor of the Bank of France Francois Villeroy de Galhau, have advocated maintaining stable rates in early spring.
Schnabel underscored the need for caution amid swiftly changing inflation dynamics and urged to be vigilant in statements about the long-term outlook. Her comments also highlighted a shift toward a more dovish stance among ECB policymakers.
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