FRANKFURT, Feb 17 (Reuters) – Financial investors may be underestimating the persistence of inflation in the euro zone, European Central Bank board member Isabel Schnabel said in an interview published on Friday.
Investors raised their bets on how far the ECB will lift borrowing costs after her comments, which were taken to suggest Schnabel was contemplating more interest rate hikes than the market was pricing in.
“Markets are priced for perfection,” she told Bloomberg.
“But there is a risk that inflation proves to be more persistent than is currently priced by financial markets,” she said.
Money markets now showed investors were expecting the rate on ECB deposits to peak at around 3.85% by the end of the summer, compared to roughly 3.70% on Thursday — before being cut again.
Schnabel, who is seen as the most influential among the ECB’s ‘hawks’ who favour higher rates, also said the central bank may need to “act more forcefully” if it found that the economy’s reaction to its tightening was weaker than in the past.
The ECB’s chief economist Philip Lane, who is often at odds with Schnabel, on Thursday listed a number of reasons why the central bank’s moves may not filter through as forcefully as before but argued this required an “open mind” about future steps.
He and fellow board member Fabio Panetta said a lot of the ECB’s past rate hikes had yet to be felt by the economy, with the latter calling for “small steps” going forward.
The ECB raised rates by a historically large 50 basis points earlier this month and pre-announced another increase of the same size for March 16.
But it kept an open mind about future moves, with most policymakers expecting another rate hike in May.