ECB's Schnabel: Price expectations, demand, borrowing costs key to rate decisions

Schnabel, known for her hawkish stance, did not specify her preferred policy path but detailed the elements that could influence the case for additional policy action.

The first factor is whether a sustained rise in energy prices will impact inflation expectations, particularly after a prolonged period of high inflation post-pandemic. Schnabel observed that while repeated high inflation episodes can make prices more salient and prompt households to increase their own price or wage expectations, most measures of longer-term inflation bets remain around 2%, partly due to the ECB's rate hikes.

"As long as expectations are firmly anchored and backed up by a track record of delivering on the inflation target, monetary policy can tolerate a more gradual return of inflation to target," she stated in a speech in Luxembourg.

A second consideration is the resilience of overall demand in the economy, as higher costs are more easily passed to consumers when growth holds up.

The third item to monitor is the impact of the recent surge in global borrowing costs, partly driven by rising U.S. yields, on the economy. Some models suggest this could weigh on growth more than the ECB currently predicts.

"It is therefore possible that the economy responds more to the recent tightening than currently assumed, which would dampen medium-term inflationary pressures compared with the baseline projection," Schnabel said.

However, robust credit dynamics indicate that interest rates may not yet be restricting the economy, and it is also possible that the "restrictive" territory is higher than previously believed, she added.