ECB's Schnabel: Economic activity globally and in the Eurozone has started to moderate

In a speech on Wednesday, ECB Governing Council Member Isabel Schnabel said that global and Eurozone economic activity had started to moderate, and that uncertainty had increased around the pace and extent of the slowdown in inflation. Nonetheless, Schnabel said that the fear of stagflation appeared to be unfounded, and reflation, not stagflation, remained the defining theme of our times.

More persistent supply bottlenecks imply that part of the increase in production and demand that was expected in 2021 and 2022 may now materialise later on. However, Schnabel conceded that there were concerns that the slowdown may be more abrupt and more enduring.

Thus, Schnabel continued, monetary policymakers need to focus on the entire range of possible outcomes to ensure that they will be able to deliver on their mandate. On the one hand, she reasoned, this means avoiding the mistake of a premature tightening of monetary policy in response to a temporary and possibly short-lived inflation spike. On the other, she continued, it means keeping a watchful eye on the upside risks to inflation that financial markets currently anticipate and retain optionality to be able to act if needed.

ECB’s Schnabel added that, in all likelihood, the output gap in the Eurozone will turn positive in 2022 and will be significantly positive in 2023 and beyond.

Market Reaction

EUR/USD has not seen any notable reaction to Schabel's comments, with the pair going sideways around 1.1300 in recent trade. Her comments about the output gap turning positive in 2022 and then significantly positive in 2023 and beyond may lend support to market expectations for ECB rate hikes from 2023.