The European Central Bank has “limited” room to raise interest rates in smaller increments because government policies to cushion households and businesses from soaring energy prices will keep eurozone inflation higher for longer, according to a senior policymaker.
Isabel Schnabel, an ECB executive board member, warned that market expectations of a shift to smaller rate rises at its meeting next month had lowered borrowing costs, making it harder to move to a slower pace of monetary tightening.
Signalling her desire to continue with rate rises of 0.75 percentage points, Schnabel told a conference in London that “the largest risk for central banks remains a policy that is falsely calibrated on the assumption of a fast decline in inflation, and hence on an underestimation of inflation persistence”.