FRANKFURT (Reuters) -Euro zone inflation is increasingly likely to ease back to the European Central Bank’s 2% target on a durable basis, ECB board member Isabel Schnabel said, dropping her long-standing warning about the difficulty of the ‘last mile’ in taming price growth.
Inflation dipped under 2% last month and economic growth is weakening, so markets are already betting that the ECB will speed up interest rate cuts with its next move seen on Oct. 17.
The comments from Schnabel, an outspoken conservative, or policy hawk in central bank parlance, will likely bolster these bets and reinforce expectations for a follow up move in December.
“We cannot ignore the headwinds to growth,” Schnabel said in a speech in the German town of Freiburg.
“With signs of softening labour demand and further progress in disinflation, a sustainable fall of inflation back to our 2% target in a timely manner is becoming more likely, despite still elevated services inflation and strong wage growth,” she said.
Markets see about a 90% chance of a 25 basis point cut in the 3.5% deposit rate later this month, coming on top of moves in June and September.
But Schnabel also said that the ECB could not solve Europe’s economic problems because deeply rooted structural issues were weighing on growth and keeping the bloc close to stagnation.
While Schnabel sounded more confident about inflation, Portuguese central bank chief Mario Centeno, one of the most dovish members of the Governing Council, expressed fears that ECB would now start undershooting the target.
“Now we face a new risk: undershooting target inflation, which could stifle economic growth,” Centeno said on Wednesday. “Fewer jobs and reduced investment would add to the sacrifice ratio already endured. A sluggish economy would reinforce, in a vicious cycle, inflation undershooting.”
(Reporting by Balazs Koranyi, Editing by Timothy Heritage and Toby Chopra)
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