The European Central Bank’s Schnabel says inflation in the euro area is expanding and will continue to rise

The European Central Bank’s Schnabel says inflation in the euro area is expanding and will continue to rise

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LUXEMBOURG (Reuters) – European Central Bank Governing Council member Isabelle Schnabel said on Thursday that inflation in the euro zone is set to rise and price growth is likely to be more steady than previously thought, defending the European Central Bank’s plans to raise interest rates.

The European Central Bank raised interest rates by a combined 125 basis points during its last two meetings to combat inflation nearing 10%, and markets have been pricing in further increases at each ECB meeting until next spring.

“There are reasons to believe that inflation may rise slightly in the short term,” Schnabel said at a conference organized by financial firm Spurkes in Luxembourg.

β€œInflation may actually be more stable than we originally thought,” she said, adding that price growth has widened and there is now a large share of goods with price growth of more than 3%.

Another concern is that long-term expectations are starting to rise and this could be an early warning for the ECB that households and businesses are losing confidence in the ECB’s willingness to bring price growth back to its 2% target.

But Schnabel also played down key inflation concerns, arguing that wage growth, a condition for permanent price growth, remains relatively muted.

β€œWages give us some relief because these second round effects are yet to materialize,” Schnabel said, adding that the risks of the wage and price spiral must be monitored β€œvery carefully.”

“While we don’t see (the effects of Round Two) now, we have to act to convey to households, businesses and market participants that we take our mandate seriously, and will do whatever is needed to bring inflation back to 2%.”

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While inflation is on the rise, economic growth is suffering, and Schnabel said the risk of a recession is increasing. While that usually means a jump in the unemployment rate, Schnabel said companies are struggling with labor scarcity so they may keep workers because rehiring them later may be more expensive.

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