(Bloomberg) -- The European Central Bank must address the euro area’s disappointing economic performance, according to Executive Board member Isabel Schnabel.
“We cannot ignore the headwinds to growth,” she said in Freiburg, Germany. “With signs of softening labor demand and further progress in disinflation, a sustainable fall of inflation back to our 2% target in a timely manner is becoming more likely, despite still elevated services inflation and strong wage growth.”
The remarks from one of the ECB’s top hawks highlight growing alarm among officials over an economic deterioration that may bring down consumer-price growth more quickly than previously foreseen.
That’s prompted investors to ramp up bets on another interest-rate cut in October — sooner than officials had previously seemed willing to act. President Christine Lagarde reinforced such expectations this week, telling European Union lawmakers that a more optimistic inflation outlook will be taken into account when rates are set on Oct. 17.
“Although the peak impact of monetary tightening is likely to be behind us and real incomes are rising as inflation falls and wages increase, growth remains shallow,” Schnabel said on Wednesday. “Over the past 18 months, the recovery has repeatedly been weaker than anticipated.”
Schnabel’s comments are an important signal that even more hawkish policymakers might not be opposed to another move in two weeks. Latvian central-bank chief Martins Kazaks told Bloomberg on Tuesday he’s in favor as well, saying the risks to the economy “have become more pronounced.”
A key source of weakness is Germany, whose manufacturing sector is weighed down by soft demand abroad and structural problems at home. France’s services sector has also slowed significantly following a temporary bump from hosting the Summer Olympics.
Schnabel highlighted the stark divergence in economic performance across the region.
“Much of the euro area’s dismal growth performance since we started raising our key policy rates can be attributed to a small group of countries, including Germany, Finland and Estonia,” she said.
September’s inflation rate dipped below 2% for the first time since 2021, though it’s expected to pick up again before settling at the target late next year.
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