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Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted and published on 10 February 2023

10 February 2023

Hi all, this is , Executive Board member at the ECB. I look forward to answering your questions for the next 45 minutes or so. Please join our conversation!

Why ECB is not fighting inflation?

: Tackling inflation is our top priority. We have hiked interest rates at a record pace and are starting to shrink our bond holdings. And we will stay the course in raising interest rates to bring inflation back to our 2% target in a timely manner.

Dear , inflation-adjusted wages have fallen all across the euro area since 2019Q4. Will more rate hikes mean the ECB thinks that wages need to fall further?

: Quite the opposite: further rate hikes will help bring inflation back to our target, which – given nominal wages – will increase real wages.

You are creating new poors and destroying business of your own citizens because of a war we didnt choose to participate, your are richer with billions in profits and EU citizens are destryed trying to survive. Shame on you

: No, by fighting high inflation we are supporting the sustainable growth of the euro area economy. The war has made us all worse off, but we’re doing our best to limit the consequences. The economy will not thrive if inflation is exceptionally high.

Dear , based on your last speech, why you think a green lending facility targeted at reducing imported #fossilflation via energy efficiency & renewables would not be a suitable option in a tightening phase? Fossilflation is happening now! Thanks 🙂

: We need to counter high inflation by tightening monetary policy. At the moment, new lending operations, even if green, are not in line with our price stability mandate. Bringing inflation back to target is our best contribution to the green transition.

: For those who missed it, please see my recent speech on monetary policy tightening and the green transition: https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230110~21c89bef1b.en.html

Why did the ECB in 2022 underestimate inflation and state that the rise is only temporary? Now inflation will stay with us for years to come.

: We and many other forecasters underestimated the persistence of inflation caused by energy price shocks, supply chain disruptions and strong demand. We are doing everything we can to bring inflation back to our 2% target in a timely manner.

Why does ECB seem to care only about homeowners and house prices?

: We care about our mandate: price stability. Housing costs matter for people’s expenditures but are only partly included in the inflation index. In our strategy review we recommended to better reflect housing costs in the future: https://www.ecb.europa.eu/home/search/review/html/ecb.strategyreview_monpol_strategy_overview.en.html

Some members of the FOMC said that the lags of monetary policy are much shorter than used to be. The full impact of policy tightening is reflected not in 12-18 months, but in 9-12, primarily because of the forward guidance. Do we see the same situation in the eurozone?Thx

: The transmission lags of our current policy measures are highly uncertain. Therefore, we are closely monitoring the degree to which our measures are becoming restrictive based on incoming data.

Are you introducing CBDC anytime?

: We are currently investigating whether to introduce a digital euro, a digital form of central bank money that people can use across the euro area. In autumn 2023 we will decide about the next phase of this multi-year project: https://www.ecb.europa.eu/paym/digital_euro/html/index.en.html

When do you think we will get at peak regarding rates hikes? How long is it necessary to remain at that level to be sure that inflation will fall back to your 2% objective?

: Rates must reach a sufficiently restrictive level. We need to see that our policies are being transmitted to the economy. We’ll keep rates high until we see robust evidence that underlying inflation returns to our target in a timely and durable manner.

Why are ECB’s decision makers not subject to the same rules of democratic oversight as other people and institutions who make important decisions that govern our daily lives? The ECB controls the worth of our money, in which people save their invested time/energy.

: Our independence must go with strong accountability. Therefore, we regularly explain our policies to the European people and their elected representatives, primarily via the . Read more: https://www.ecb.europa.eu/ecb/orga/accountability/html/index.en.html

, can you tell us what is the reasoning behind the arbitrary “inflation” target of 2%? why is it not 1% or 0%?

: Many central banks have a 2% inflation target. It offers a safety margin against deflation risks and eases the constraint from the zero lower bound on interest rates. In the euro area, it also leaves room for differences in inflation across countries.

: Read our explainer in 24 EU languages for more: https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/stableprices.en.html

Wie analysiert/überprüft die #ECB im Nachhinein, ob sinkende Inflationsraten in der Eurozone mit der Zinspolitik zusammen hingen? Was wäre die Konsequenz, wenn sich herausstellen sollte, dass die Inflation auch ohne Zinsanhebungen gesunken wäre?

: Wir analysieren die Effekte der Geldpolitik in Strukturmodellen. Die derzeitige Inflation wird durch nachfrage- und angebotsseitige Faktoren getrieben und wird aller Voraussicht nach nicht von allein verschwinden. Daher muss die Geldpolitik handeln.

: We analyse the effects of monetary policy in structural models. Our current assessment suggests that inflation is driven by both demand- and supply-side factors and is unlikely to vanish by itself. Therefore, monetary policy needs to respond.

Will the bank give up from the cash when the CBDC put into force? or is there any plan to keep some small amount of cash for minimal transactions? and how will banks create money under the CBDC regime? Thanks.

: There is no intention to abandon cash. A digital euro would complement cash, not replace it. With a CBDC, the process of money creation would continue to work through banks. Please see our cash strategy: https://www.ecb.europa.eu/euro/cash_strategy/html/index.en.html

The only mandate ECB has is price stability. Why are you wasting your time and resources on climate related initiatives while your only mandate is in shatters?

: As climate change and the green transition affect price stability, we cannot ignore them. They are an integral part of our mandate. But governments are in the driving seat. See my recent speech: https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220317_2~dbb3582f0a.en.html

Why do you have a Ukrainian flag beside your name? The ECB does not have jurisdiction over Ukraine, and you are not Ukrainian.

: Like many others, I added the flag in solidarity with the people of Ukraine who are suffering from the unjust and unprovoked Russian war of aggression against their country. 🇺🇦🌻🕊️

Why was your ( ECB ) inflation forecasting so wrong?

: The economy has been subject to unprecedented shocks, such as the pandemic and the horrible war in Ukraine. This has created exceptional challenges for all professional forecasters. We are continuously working to improve our models.

How do you deal with the constant trolling by Bitcoin fanboys?

: Everybody is entitled to their opinion, on social media and in real life, and exchanges of views are welcome as long as they are constructive. As a rule, I mute all accounts with insulting content.

Hallo Isabel. I would like to ask you if you think the euro can last without further European integration? Should member states in your opinion, be willing to give up more national sovereignty to Brussels? Thanks for your answers. Best regards, Keimp

: The monetary union would be strengthened if the single monetary policy were complemented by a fiscal policy tool at European level. This would improve risk sharing and offer better ways to respond to large shocks, as with #NGEU in the pandemic.

How big of an yield and inflation impact do you project with the end to full reinvestments under the APP? Can the elasticities you show your Sep21 speech be applied when reducing the stock of holdings? https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210915~75de3a2dfa.en.html

: The anticipation of balance sheet run-off has already likely contributed to rising bond yields in the euro area. We would expect the effects of QE and QT to be largely symmetric.

Is there a fixed limit to the new “Green QE”?

: The volume of our bond purchases under QE is determined solely by our monetary policy objective. Given this, we aim to decarbonise our corporate bond holdings in line with the Paris Agreement by tilting our purchases towards greener firms.

Please tell us if you have open information for ECB developed CBDC and especially how are you going to implement privacy and anonymity with it?

: A digital euro cannot be fully anonymous, especially for large payments, because it could then be used for illicit purposes. But ensuring a high degree of privacy of personal data and payments will be one of our key priorities: https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp221107~dcc0cd8ed9.en.html

Why does the ECB need an office in London?

: The United Kingdom remains an important partner of the European Union and the euro area, and London is still a global financial centre. Therefore, the ECB has a small office in London to maintain our network and collect market intelligence.

Dear , you said a green lending facility wouldn’t be compatible with monetary tightening. Providing the impact of tightening on the financing of the EU ecological and energy transition, isn’t this reasoning exposing the EU to future inflationary shocks?

: Please see my reply:

: We need to counter high inflation by tightening monetary policy. At the moment, new lending operations, even if green, are not in line with our price stability mandate. Bringing inflation back to target is our best contribution to the green transition.

Do you or your family members own any #Bitcoin ? And why?

: No, I consider such an investment too risky. And as a high-level ECB official, I am not allowed to hold crypto-assets. Please see Art. 16.3 of our Code of Conduct regarding the rules on financial transactions: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:JOC_2022_478_R_0003&from=EN

Is the ECB considering any reform to their process to meet the price stability objective in the aftermath of the current unprecedented inflation target slip?

: No. We just revised our monetary policy strategy in 2021. Current high inflation is not caused by flaws in our framework. Our next review is planned for 2025. For more on the strategy review: https://www.ecb.europa.eu/home/search/review/html/index.en.html

Now #chips #ISO20022 has been delayed (again) till April 2024 will that have a bearing on #ecb “Big Bang” migration at the end of March 2023?

: The launch of the new real-time gross settlement system and T2 is still scheduled for 20 March 2023. There have been no changes to what we announced in October. See the press release: https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr221020~432ea01228.en.html

What are the best indicators of the “greeness” of bonds you will buy and in practice which indicator will you use and why?

: We define our climate scores on the basis of three criteria:

1.Past emissions of the issuer (scope 1 & 2, partly scope 3)

2.Plans to reduce future emissions (validated by 3rd party)

3.Quality of climate disclosures Read our FAQs https://www.ecb.europa.eu/mopo/implement/app/html/ecb.cspp_climate_change-faq.en.html

The Anthropocene Fixed Income Institute assessment suggests that by selling bonds of just 25 fossil fuel issuers the EBC CSPP bond portfolio GHG emissions would be reduced by 90%. Are the measures already adopted by the ECB sufficient for such sell off to happen quickly?

: The transition needs to happen in those sectors that currently have the highest greenhouse gas emissions. Therefore, we have decided against an exclusion approach. We need to preserve incentives for transition. More here: https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230110~21c89bef1b.en.html

Dear : inflation-adjusted wages have fallen, mostly in Spain, mortages are at 2008 highs, economy is stopped… Is the ECB turning an energy crisis into an economic crisis while euro is raising and desinflation has begun? Thanks!

: Broad disinflation has not started in the euro area. We need to use all our tools to restore price stability and support sustainable growth. Otherwise we would see even sharper declines in real wages, and we may need to hike interest rates even more.

Why do you lower IMMEDIATELY rates to 0% when inflation is below 2% and you do not act at all when inflation is so much above target?

: We take too high inflation as seriously as too low inflation. We are currently in the fastest rate hiking cycle in the ECB’s history. Our policy rates have gone up by 3 percentage points over the past seven months. And we still have ground to cover.

Given the dismal record of your inflation projections, why don‘t you use the current inflation rate as a proxy for future inflation rates? .

: In today’s uncertain environment marked by unprecedented shocks, many forecasts, including our own, have been off the mark. That’s why we always use all available data, including current inflation, to get a better picture of the inflation outlook.

Honest question (and thanks for doing this): Why would I as an individual, for the long term, prefer to hold a currency intended to lose 2% value a year over a currency with fixed supply?

: The euro is one of the most stable currencies in the world and enjoys a lot of trust. Fixed supply does not guarantee a stable value of assets. They can still exhibit sharp price fluctuations.

Hi ! The approach laid out by the for the greening of CSPP is close to the one used by the . However, this approach has already shown to be insufficient to achieve 1.5°C portfolio alignment. Will the ECB consider updating it?

: Further efforts are needed to make our operations Paris aligned. In a recent speech, I laid out three areas of action: corporate bond holdings, public sector bond holdings and lending operations including collateral. See here: https://www.ecb.europa.eu/press/key/date/2023/html/ecb.sp230110~21c89bef1b.en.html

what are the differences between swift and a CBDC?

: These are two very different things: a central bank digital currency is digital money issued directly by a central bank for people. SWIFT is a private service provider for financial transactions and payments between banks worldwide.

Do you think that the current path for ECB rate hikes priced in by markets is enough to return inflation to 2% in a timely manner?

: The rate path rests on the market’s view that inflation returns to our target quickly. Our decisions will be based on incoming data. We need to see robust evidence that underlying inflation is returning to our target in a timely and durable manner.

De Guindos said yesterday that he believes conditions are improving, and the eurozone could avoid recession. Is it possible to continue tightening in order to avoid a second round of inflation and avoid an economic recession?

: Tighter financing conditions dampen economic demand and thereby economic activity. This does not necessarily lead to a recession. A soft landing is possible but not guaranteed.

The latest BLS showed that credit conditions are worsening. Do you expect a credit crunch in the near term?

: Tighter credit conditions are a first indication that monetary policy is becoming effective. But they also reflect banks’ risk perceptions that may change if the economy improves. Slower loan growth is an essential part of the transmission mechanism.

I got only 1 question: When rates above core inflation? 😊

: Real interest rates at all tenors have increased measurably in recent months, reflecting to a considerable extent the ongoing tightening of monetary policy. Persistently higher real rates are required to restore price stability.

How do you see the current market pricing relative to your own expectation of the needed monetary policy tightening?

: Please see my reply:

: The rate path rests on the market’s view that inflation returns to our target quickly. Our decisions will be based on incoming data. We need to see robust evidence that underlying inflation is returning to our target in a timely and durable manner.

would you say 50 is off the table for May?

: We cannot yet claim victory in taming inflation. That’s why we need to stay the course and raise rates significantly further. Whether another 50 basis point hike is needed will depend on incoming data and our assessment of the inflation outlook.

What is your view on monetary policy lags – shorter, longer, or same as before – and the implications for the required tightening in the ECB’s stance this year?

: Please see my reply:

: The transmission lags of our current policy measures are highly uncertain. Therefore, we are closely monitoring the degree to which our measures are becoming restrictive based on incoming data.

You’ve said that “So far, monetary tightening has had little effect”. However, in the last Bank Lending Survey, we see a high number of banks reporting a decrease in demand for credit because of the “general level of interest rates”. What are your thoughts about that?

: Monetary policy has had little effect so far *on inflation*. Tighter bank lending conditions are early signs that our tighter monetary policy is working. But they also seem to be driven by banks’ risk perceptions.

you said that your main motivation for rising interest rates was to safeguard credibility and keep market expectations anchored. Which metric do you use to analyse the degree of expectations’ anchoring? What evidence do we have that (de)anchoring exists & is tractable?

: We look at a wide range of indicators from market pricing to surveys. Longer-term inflation expectations remain largely anchored, but the right-hand tail has increased in many cases, which we are closely monitoring.

Dear Mrs , what is the net effect on inflation the expects from China’s return to growth and trade after its lockdowns?

: There are many different effects, including on energy and commodity prices, foreign demand, bottlenecks and international competition. The net effect on euro area inflation is likely to be positive in 2023.

Do EBC consider any changes in central bank goals? Are “green” goals possible?

: Our primary mandate, defined by the Treaty, is price stability, which is affected by climate change. Without prejudice to price stability, we stand ready to support the fight against climate change and ensure alignment with the Paris Agreement.

Hallo! Do you expect ECB to adopt a zero interest rate policy in the medium run, if at all?

: The return of a low inflation, low growth environment with low interest rates is not my baseline but cannot be excluded. It depends on how big structural changes, like the green transition, demography, digitalisation, globalisation, will play out.

What are the advantages for a country to join the eurozone?

: The euro removes exchange rate fluctuations and thereby makes trade and travel easier. Even as inflation is far too high, the euro has provided more price stability on average than the national currencies before it. The euro is a symbol of our unity.

Time to wrap up for today. Many thanks for your questions – I really enjoyed our chat! Take care,





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