Softening remarks by ECB hawk prompts bets on March interest rate cut

Inflation data released last week now make another hike in borrowing costs 'rather unlikely', Isabel Schnabel said

ECB board member Isabel Schnabel: 'When the facts change, I change my mind. What do you do, sir?'

One of the European Central Bank’s most hawkish officials said inflation was showing a “remarkable” slowdown, a U-turn prompting markets to ramp up bets on an interest-rate cut as early as March.

Executive board member Isabel Schnabel said the consumer-price data released last week now make another hike in borrowing costs “rather unlikely”, but refused to be drawn on the prospect a reduction could even transpire within six months.

Money markets ramped up bets on faster and deeper rate cuts after the comments, almost fully pricing a quarter-point drop by March and a 1.5% worth of decreases by the end of next year. 

The odds of a move in the first quarter were almost zero three weeks ago, while late last month only three quarter-point cuts were priced for next year. 

Ms Schnabel spoke days after a report showed eurozone inflation slowed to 2.4%, far lower than economists had anticipated and approaching the ECB’s 2% target. So-called core price growth — which strips out volatile elements such as energy — has also retreated.

'Very pleasant surprise'

“The November flash release was a very pleasant surprise,” she said according to a transcript of the interview that was published on the ECB’s website. 

“Most importantly, underlying inflation, which has proven more stubborn, is now also falling more quickly than we had expected. This is quite remarkable. All in all, inflation developments have been encouraging,” she said. 

Just a month ago, after October data also showed slowing price growth, Ms Schnabel had cautioned it was too early to rule out another rate hike and compared the fight to bring inflation to the target with overcoming the last mile in a long-distance run.

When asked if she had changed her view, she cited a famous quote by economist John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?” While effectively ruling out another rate hike, she was less specific on the prospect of the cut that traders are betting on.

Meanwhile, figures showed price increases in OECD countries slowed in October to the weakest in two years in a sign advanced economies are overcoming their worst inflation crisis in decades. 

The headline measure for the 38-member club, which includes all Group of Seven economies, dropped to 5.6% from 6.2% in September, as food-cost pressures lessened rapidly and energy prices fell back. 

The Paris-based organisation said 28 countries saw declines in inflation rates. Core price growth, which is closely watched, was at 6.5%. 

• Bloomberg