Interview with Süddeutsche Zeitung

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Markus Zydra, Bastian Brinkmann and Meike Schreiber on 10 January 2022

14 January 2022

Ms Schnabel, inflation in the euro area now stands at 5% – a record high. When are you finally going to intervene?

We view these figures with some concern, as they are higher than we initially expected. And we fully understand many people’s worries about the drop in real wages and interest income – all the more so as people on lower incomes are hit particularly hard by higher inflation. We take that very seriously.

Concerns alone will not bring inflation down.

Our decisions are based on a medium-term perspective covering around one to three years. We expect that inflation will fall significantly over the medium term. That is why we are not raising interest rates now, as some are calling for.

Long-term planning is all very well, but people are being hit by higher prices here and now.

Any measures we might take today will only have an effect with a lag. The current rate of inflation won’t be affected, only the future one. Most forecasts – our own and others − indicate that the surge in inflation caused by the pandemic will be followed by a marked decline. In our projections, medium-term inflation will even fall back below our target of 2%, even though we acknowledge that the projections are now subject to great uncertainty. That is why we should not raise interest rates prematurely, as that could potentially choke off the recovery. But we will act quickly and decisively if we conclude that inflation may settle above 2%. A precondition for raising interest rates is to end net asset purchases; and our December decision is a first step in this direction.

And if you get it wrong, we all pay a high price.

That’s exactly why we don’t base our decisions solely on economic models but also conduct surveys about expectations among households and firms, for example. This enables us to cross-check the plausibility of the projections. And these surveys do indeed show upward risks with respect to inflation. We are aware that monetary policy bears a huge responsibility for people’s prosperity. But premature action by monetary policy would also come at a price: it could hold back the nascent recovery, and that would jeopardise jobs.

But doesn’t the ECB’s inaction so far in truth reflect its fear that the euro debt crisis might flare up again, first and foremost in Italy, and that stock markets might collapse?

I know that some people in Germany take this view, but it’s not the case. Our actions are guided solely by our price stability mandate. Public borrowing by individual countries has no bearing on the Governing Council’s decisions. How financial markets will respond to the exit from our expansionary monetary policy measures is obviously an aspect that we need to consider because it affects the financing conditions for households and firms. But that is an entirely different matter to keeping interest rates low purely to help certain countries repay their debt.

EU surveys show that people perceive inflation to be even higher than measured. Doesn’t this perceived inflation harm your reputation?

Inflation is officially calculated using an average consumption basket; the selection of goods bought by an individual consumer typically differs. Moreover, people perceive some price changes more strongly than others, particularly for goods they consume frequently. The prices of petrol and heating fuel, for example, are now increasing significantly, with the result that perceived inflation is higher than actual inflation. We have an inflation calculator on our website which allows people to discover their individual inflation rate. In addition, when calculated over a longer period, inflation has not increased as much as suggested by latest figures. If one compares prices today with prices two years ago, one sees that average annual inflation in Germany in December was just 2.5%, as prices actually fell in the first year of the pandemic.

To ask a fundamental question: why are you aiming for inflation of 2%? Surely 0% is far more stable.

Let me mention two important reasons. First, we steer inflation for the entire euro area. At an average rate of 0%, some Member States would be experiencing deflation, which economists see as very harmful. Second, a slightly positive inflation target facilitates economic adjustment processes geared to preserving competitiveness. It enables a reduction in real, i.e. inflation-adjusted, wages. As nominal wages typically do not decline, any necessary adjustments could otherwise lead to higher unemployment.

Okay, that might sound plausible, but it’s very hard to understand. How do you intend to convince people on that basis?

Our policy can only succeed if people trust the ECB. That’s why we take every effort to explain complex topics in the simplest form possible. Perhaps we don’t always manage. However, that doesn’t mean we should pursue an inappropriate monetary policy just because we are worried that our measures are difficult to explain – that would have negative economic consequences. We must instead keep doing our best to make our actions understood.

At the regulars’ table and online, you don’t just face criticism; you’re now also attacked personally and an object of hate. How do you deal with that?

That can be very unpleasant. I try to ignore personal attacks. But Twitter, for instance, is a great medium, because I get feedback straight from people, some of whom I don’t know personally, who want to tell me something – directly and unfiltered. I also monitor what the tabloids are saying. Some things are exaggerated, but they do reflect the mood of the people, and it’s important for us to understand that mood. All in all, we’ve not yet done a good enough job of finding simple words to explain monetary policy. For that reason, we are putting a lot of energy into communication. We have to get even better in this regard.

Energy prices are driving up inflation fast. What annoys you more: the high price of petrol or the rising cost of heating?

I know that particularly the rising energy costs are a severe problem for many people right now. One of the reasons why energy prices have risen so sharply is that economic activity picked up strongly after the easing of the strict lockdown measures. In turn, the demand for energy took off, and supply was not able to catch up quickly. This caused prices for raw materials to rise at a pace that took many by surprise. Monetary policy cannot reduce the price of oil or gas. Instead, we are asking ourselves whether second-round effects will result from the high energy prices. This would imply that other goods and services would also become more expensive and wages would start rising, which could lead to a more persistent increase in inflation.

One way or another, that’s coming: transitioning to a climate-neutral economy is making carbon more expensive – and that will make almost everything else more expensive too. Is the goal of price stability at odds with the goal of climate neutrality?

There are ongoing debates about the impact of the green transition on inflation. If it leads to higher inflation, monetary policy needs to react under certain circumstances. This is especially the case if higher inflation threatens to become entrenched in people’s expectations, or if the green transition triggers an economic boom that in turn leads to rising prices.

In simple terms, higher interest rates. So the ECB could hamper the politically desirable transformation to a climate-neutral economy. Is a climate conflict likely to break out between central bankers and politicians?

The ECB is committed to price stability. The transition to a climate-neutral economy will require a change in relative prices, and the prime responsibility for this rests with the governments. The sooner we succeed in creating low-carbon alternatives, the smoother the transformation will be.

There was talk about you becoming Bundesbank President, but Joachim Nagel got the nod. Wouldn’t it have been about time to choose a woman in 2022?

I really look forward to working with Joachim Nagel. He’s a good choice – and I’m really happy here at the ECB. At 8% – or two out of 25 members – the proportion of women on the ECB’s Governing Council is of course disappointingly low. The German government could have contributed to increasing that share.

ECB President Christine Lagarde and you want to do more for women at the ECB. How?

This has been on the agenda for some time but has gained greater momentum under Madame Lagarde. Our research indicates that women at the ECB apply for promotions less often, even if they would have good chance to succeed. So, we are now explicitly encouraging women to apply. Since then, the figures have improved significantly. In addition, our gender strategy features explicit targets of 50% for new hires and promotions. We are already noticing that this makes a difference.

Discrimination and poor treatment of women at work are structural problems and occur everywhere. How is the ECB responding to the “Me Too” movement?

I’m not aware of any specific instances of sexual harassment at the ECB. But of course that doesn’t mean that this is true. How are we dealing with this? For one, the ECB is making every effort to create as inclusive an environment as possible, in which the probability of something like that happening is small. Sexual harassment is likely related to the general working atmosphere, like how we are dealing with hierarchies. At the same time, it must be possible for the people affected to report cases, and they must enjoy comprehensive protection when they do so. We have dedicated contact persons in every business area. We have also set up a whistleblowing platform where people can report incidents anonymously. And last but not least, we survey our staff regularly about the working environment and topics like diversity and inclusion. The ECB would certainly not tolerate such breaches in any form.

Particularly at the ECB, many staff stay for a very long time. Doesn’t this mean that you should actively investigate whether there were any cases earlier?

We started asking about inappropriate behaviour in our internal surveys in 2018. To date we have not received any indication that would suggest sexual harassment has taken place. We haven’t yet discussed whether we should investigate further back into the past. But that is certainly worthwhile to consider. What is important for us is to keep improving our structures and reporting systems.