Jackson Hole ECB Talking Points
- ECB’s German economist Isabel Schnabel raises concerns about current Euro levels
- Schnabel’s Jackson Hole Economic Symposium comments sets hawkish tone
- Her comments portend a 75 basis point rate hike at ECB’s Sept. meeting. “Policy prescribes a forceful response as inflation remains elevated”
During the August Jackson Hole Economic Symposium members of the European Central Bank (ECB) expressed concerns about persistent inflation and the current monetary policy stance. In July, the Eurozone CPI reached an all-time high of 9.1% and the ECB raised interest rates (for the first time since 2014) by 50 basis points to 0.0%. Despite the hike, investors questioned if the ECB has lagged in its effort to curb inflation.
At Jackson Hole, Isabel Schnabel, a German economist serving as executive board member of the ECB since 2019, delivered a speech that surprised investors by clearly delivering an aggressive hawkish tone. In her discourse, she talked about “Monetary Policy and the Great Volatility” while other members questioned the levels of the EUR/USD.
EUR/USD is trading at 20-year lows. Its level below parity for the first time since 2002 may be a reflection of fear. It could also be hurting because of fragmentation risks or simply because of interest rate differentials. Schnabel, along with other ECB members, highlighted the risk of people beginning to doubt the long-term stability of the currency. Some suggested that while the ECB should not retreat too soon even if inflation slows, the weakness of the euro is a problem and at the next monetary policy meeting, a significant step should be considered.
EUR/USD Monthly Chart
A coming Euro crisis?
Schnabel said that both the effects of the pandemic and the war in Ukraine are currently causing macroeconomic volatility but other factors could cause permanent shocks. She said that climate change, protectionist policies and the shift to greener technology may lead to persistent disturbances in the years ahead.
For example, climate change is causing extreme and disruptive weather events (like the drought in Europe) that have exposed the global economy and triggered greater volatility in output and inflation.
Likewise, protectionist policies have exacerbated the war’s repercussions on supply. Such policies affect the global value chains and in turn can cause misery and social unrest. Enhancing supply diversification and competition is key to making value chains more robust, she said.
Changes from climate & green tech
What’s more, the shift to greener technology, even though it could bring benefits in the long run, requires resources such as metals and minerals that are either constrained or often concentrated in a small number of countries. Such conditions could spur additional price pressures.
In the face of such risks, Schnabel talked about the role of fiscal and monetary policy. She said fiscal policy should promote productive investments to secure long-term prosperity. Regarding monetary policy, because it operates with long lags, central banks need to prove how determined they are to protect price stability, even if it requires a tradeoff between output and inflation.
On this note, in a previous article ECB’s Lagarde Test , we highlighted that the ECB is in a difficult spot as it tries to balance the need for higher rates amid an already “growth-strapped” economy. But last weekend, the Jackson Hole Symposium, sent a strong message.
The effects of the pandemic and the war in Ukraine are currently and constantly suppressing the aggregate supply in a time of strong demand. Tight labor markets are also feeding the inflationary pressures. It remains uncertain how persistent inflation may be. Monetary policy needs to be forceful, even at the risk of lower growth, to minimize the risk of even worse economic outcomes in the future, Schnabel observed.
Pointing to surveys that are starting to show that price pressures have lowered trust in Central Banks, Schnabel said determined action is needed to prove commitment to securing price stability.
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— Written by Cecilia Sanchez-Corona, DailyFX.com
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