The European Central Bank's (ECB) Executive Board member Isabel Schnabel said on Wednesday that the euro area's near-term economic outlook remains weak in line with the ECB's projections. She admitted that the financial conditions in the region have loosened more than projected, while energy prices have been weaker. In addition, the official noted the drop in unemployment to a historical low confirms continued strong resilience in labour markets, which is broadly in line with the ECB's December 2023 projections.
Regarding price growth, Schnabel said that inflation has eased but underlying price pressures remain elevated. "Policy rates need to be sufficiently restrictive for as long as necessary to ensure that inflation sustainably returns to 2%," she added. Also, Schnabel noted that a slowing economy is part of monetary policy transmission.
Schnabel also reminded that the ECB's projections foresee inflation reaching our 2% target in 2025. "So we are on the right track," she added. The official, however, acknowledged that geopolitical tensions are one of the upside risks to inflation as they could drive up energy prices or freight costs. "That’s why we need to remain vigilant," she said.
In addition, Schnabel expressed the view that it is too early to discuss rate cuts. According to her, the ECB's policymakers will keep its key policy rates at restrictive levels until they are confident that inflation sustainably returns to our 2% target. "This requires additional data confirming the disinflationary process," she added.