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Lower borrowing costs risk ‘flare-up’ of inflation, warns ECB policymaker

A senior official at the European Central Bank (ECB) has expressed concerns regarding the potential implications of decreasing borrowing costs in the eurozone. Isabel Schnabel, a prominent figure on the ECB’s executive board, has cautioned that this trend might reignite inflation and affect the region’s economic rebound.

Schnabel highlighted the recent drop in eurozone inflation, attributing it to the waning impact of supply shocks. Despite this decline, she emphasized the need for patience and vigilance, suggesting that inflationary pressures could resurface.

Although there has been significant progress in lowering inflation from its peak in October 2022, Schnabel stressed that the ECB’s target of achieving 2 percent inflation has yet to be reached. She pointed out that commercial lenders are adjusting mortgage rates in anticipation of potential interest rate cuts by the ECB, advising against hasty policy adjustments.

While investors anticipate rate cuts starting in April, policymakers have refrained from making definitive commitments, citing the necessity to assess the impact of wage growth on prices. Schnabel voiced concerns about rising labor costs amid declining productivity, which could result in higher consumer prices or reduced profit margins for businesses.

She highlighted the recent decline in mortgage rates in Germany and France as evidence of easing financial conditions. However, Schnabel remains cautious, citing ongoing inflationary pressures and the potential for supply chain disruptions to impact the region’s economic recovery.

In summary, Schnabel’s remarks underscore the importance of finding a balance between stimulating economic growth and managing inflation risks in the eurozone.

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