European Central Bank (ECB) Executive Board member Isabel Schnabel emphasized the importance of a data-driven approach to policy decisions in light of recent disturbances in the banking sector. She stated yesterday, “I can’t tell you what we’ll decide at the next meeting, and especially at the following meetings,” adding that the situation has become “even more complex.”

Schnabel noted the significance of monitoring the potential impact of banking sector uncertainty on lending, saying, “It’s even more important that we look at all the data we’ll get. It’s important whether the uncertainty in the banking sector will have an additional impact on lending.”

When discussing the ECB’s future plans for its balance sheet, Schnabel admitted that the endpoint remains uncertain and is currently under discussion. She emphasized the need to manage the balance sheet in a way that markets can digest during these turbulent times and expressed satisfaction with the current approach, stating, “So far, it’s worked extraordinarily well.”

ECB Chief Economist Philip Lane noted in a speech that “since the cut-off date for the March 2023 projections, the incoming data have been mixed.”

Lane pointed out the ongoing divergence in sectoral performance, as services business activity experiences accelerated expansion due to strong reopening effects and increased incomes. In contrast, manufacturing output remained stagnant in the first quarter. He also indicated that the consistent improvement in business and consumer sentiment, despite remaining at low levels, appears to have reached a plateau.

Lane mentioned that market pricing and the ECB’s Survey of Monetary Analysts (SMA) foresee that the “policy rate will rise further in the near term and will remain at elevated levels for an extended period.”

He explained that once inflation stabilizes at the 2% target in the medium term, it is projected that the policy rate will settle around 2% instead of returning to ultra-low levels. This expectation is primarily driven by the re-anchoring of long-term inflation expectations at the ECB’s 2% target, indicating that market participants and monetary analysts anticipate the longer-term equilibrium real rate to hover around zero per cent.

Full speech of ECB Lane here.

ECB Chief Economist Philip Lane has indicated in a Bloomberg TV interview that another rate hike in May is appropriate, given the current economic landscape. He stated, “As of now, two weeks away, I think the baseline is that we should increase interest rates in May but what we do in terms of scale, I’m not going to set a default number.”

However, Lane emphasized the importance of waiting for more data before making a final decision. He highlighted the central bank’s reliance on data, saying, “We are now in an intense phase of data dependence. I’m very much in wait-and-see mode.”

He also discussed the ECB’s deposit rate, which is currently at 3%, and suggested that it would likely remain at its peak for a prolonged period if inflation returns to 2% and the eurozone avoids a recession, as officials predict. “It would be appropriate to keep rates at the plateau level for a while before returning back to normal,” Lane added.

ECB Governing Council member Martins Kazaks has suggested that a smaller rate hike of 25 basis points in May is possible, although a 50 basis point increase should not be dismissed entirely.

In an interview with Latvian news service Leta, Kazaks stated, “At some points, it’s only natural that the step size is reduced. For example, the increase could be not 50 basis points, but 25 basis points.”

Regarding the upcoming ECB Council meeting in May, Kazaks commented, “Should we move to a lower step already at the ECB Council meeting in May? I think there is every possibility for that, but a 50 basis point increase is not an option that can be ignored.”

Kazaks remains optimistic about the Eurozone’s economic outlook, pointing out that “the economy is still resilient, there will probably not be a recession in the Eurozone this year, the labor market remains strong, the pressure on wages is still very high and in some cases even increasing. Therefore, in my opinion, a rate increase is necessary.”