Central banks need to tighten policy even in recession, says ECB’s Schnabel

Isabel Schnabel, in Frankfurt, Germany, November 22, 2019. REUTERS/Ralph Orlowski/File Photo

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JACKSON HOLE, Wyo., Aug 27 (Reuters) – Central banks around the world are at risk of losing public confidence and must now act forcefully to fight inflation, even if it drags their economies into recession, said Saturday Isabel Schnabel, member of the board of directors of the European Central Bank. .

Inflation is near double-digit territory in many of the world’s major economies and any decline is expected to be slow, keeping prices above central bank targets for years to come.

“Even if we enter a recession, we have no choice but to continue on the path to normalization,” Schnabel told the US Federal Reserve’s Jackson Hole Economic Symposium. “If there were a deanchoring of inflation expectations, the effect on the economy would be even worse.”

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She also warned central banks against pausing at the first sign of a potential reversal in inflationary pressures. Instead, policymakers should signal their “strong determination” to bring inflation back to target quickly, she said.

“If the public expects central banks to let their guard down about the risks to economic growth – that is, if they give up their fight against inflation prematurely – then we risk seeing a much more abrupt correction,” Schnabel added.

She argued that the risk was growing that longer-term inflation expectations would overshoot the bank’s target, or “unanchor”, and surveys now suggest inflation is undermining public confidence in central banks. .

“The likelihood and cost of current high inflation rooted in expectations is uncomfortably high,” Schnabel said. “In this environment, central banks need to act forcefully.”

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Reporting by Balazs Koranyi and Howard Schneider; Editing by Bill Berkrot

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