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ECB's Schnabel Asserts No Exclusion of Future Rate Hikes

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ECB's Schnabel Suggests Possibility of Further Rate Hikes

Isabel Schnabel, a member of the European Central Bank's Executive Board, has stated that the fight against inflation may require additional interest rate increases. In a speech in St. Louis, Schnabel emphasized the fragility of inflation expectations after a prolonged period of high inflation and the potential destabilizing impact of renewed supply-side shocks. She asserted that the door to further rate hikes cannot be closed. Schnabel's comments come after the ECB recently left interest rates unchanged for the first time in over a year. Market analysts and economists predict that the deposit rate will likely remain at 4% until at least 2024, given the significant slowdown in inflation in recent months. Schnabel also highlighted the challenges in reaching the ECB's 2% inflation target. She noted that it took a year to bring inflation down from 10.6% to 2% and expects it to take twice as long to return to that level. The Executive Board member emphasized the importance of two conditions for underlying inflation to align with ECB forecasts: a decrease in unit labor costs consistent with 2% medium-term inflation and firms using their profit margins to limit the pass-through of wage increases to consumer prices. While Schnabel acknowledged that the inflation target is within reach, she cautioned that the final stretch is often the most challenging. She warned of potential shocks, such as Middle East tensions, strikes at LNG plants in Australia, and the impact of global warming, which could disrupt the disinflation process. Schnabel called for perseverance and vigilance in achieving the inflation target. In separate remarks, Dutch central bank chief Klaas Knot also suggested the need for restrictive policies to return inflation to the 2% target. He expressed his view that the current policy rates are suitable for the time being, pending confirmation from incoming data. Overall, Schnabel's remarks underscore the ECB's commitment to addressing inflation and the potential for future rate hikes to maintain price stability.

Hot Take: Potential Impact of ECB's Possible Rate Hikes on New Businesses

The potential for further rate hikes suggested by Isabel Schnabel, a member of the European Central Bank's Executive Board, could have significant implications for new businesses. Higher interest rates generally mean increased borrowing costs, which could impact startups and small businesses seeking loans for expansion or operational expenses. This could lead to a slowdown in business growth and potentially discourage entrepreneurship. Furthermore, the emphasis on fighting inflation could signal a period of economic uncertainty. Inflation can erode purchasing power, leading to decreased consumer spending, which could hit new businesses particularly hard. However, it's not all doom and gloom. Higher interest rates could also mean higher returns on savings, which could benefit businesses with significant cash reserves. Moreover, the focus on maintaining price stability could help create a more predictable business environment in the long run, which is beneficial for business planning and forecasting. In conclusion, while the possibility of further rate hikes could present challenges, it also underscores the importance of effective financial management for new businesses. It serves as a reminder for businesses to plan for different economic scenarios and to remain agile in the face of changing economic conditions.
Story First Published at: https://financialpost.com/pmn/business-pmn/ecb-cant-close-door-to-further-rate-hikes-schnabel-says
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