FRANKFURT (Reuters) - Euro zone growth is weaker than predicted just a few months ago but this does not automatically void the need for more rate hikes, especially as investors are undoing some of the European Central Bank's past work, ECB board member Isabel Schnabel said.
The ECB has raised rates at each of its policy meetings in the past 13 months and policymakers are debating whether to pause given the economic slowdown or to hike again, perhaps for the last time, to put inflation firmly on course to 2%.
While Schnabel, a conservative who has advocated tighter policy in the past, acknowledged the growth headwinds, she did not take a firm view on the next move and raised several arguments suggesting that the job may not be done.
Markets have revised their rate expectations in recent months on the weaker growth outlook and this may have undone the ECB's past efforts, possibly requiring more action, she argued in a speech at a conference in Frankfurt.
"Real risk-free rates have declined across the maturity spectrum and are now back to the level observed at the February Governing Council meeting, as investors have revised their expectations for economic growth, inflation and monetary policy," Schnabel said. "This decline could counteract our efforts to bring inflation back to target in a timely manner."
Some policymakers on both sides of the Atlantic have argued that central banks could trade another rate hike for a promise to hold rates even longer, but Schnabel dismissed the "high for longer" premise as unsound economics.
"We cannot trade off a need for a further tightening of monetary policy today against a promise to hold rates at a certain level for longer," she said. "Such a promise would raise time inconsistency issues."
She said that indicators were signalling "unprecedented tightness" in the labour market and labour shortages can lead to a steeper wage increases, which would then fuel inflation.
She also argued that even if growth was weak, there were no indications that the bloc is facing a deep or prolonged recession.