Eurozone inflation is expected to remain close to the 2% target rather than falling too low, with risks tilted to the upside, according to European Central Bank (ECB) board member Isabel Schnabel. She said the bank could tolerate some deviations from the inflation target.
Schnabel dismissed concerns that inflation would remain as low as in the pre-pandemic era and stressed that many factors now point to a healthier and more active economy. She noted that the output gap is narrowing and significant fiscal stimulus is expected to strengthen economic growth.
She added that the economy is not currently showing signs of disinflationary pressures, but rather that current factors may be pushing inflation higher. Exchange rates have stabilized and fears that China will flood European markets with cheap goods have not materialized.
Schnabel also stressed that geopolitical tensions and supply chain disruptions could lead to higher costs, including loss of access to key raw materials such as rare earths.
Food inflation remains high and wage growth has declined more slowly than expected, which Schnabel said suggests inflation risks are more likely to rise than fall in the near term.
