Markets may be overestimating Delta's impact on growth - ECB's Schnabel - Metro US

Markets may be overestimating Delta’s impact on growth – ECB’s Schnabel

FILE PHOTO: Isabel Schnabel in Frankfurt

FRANKFURT (Reuters) – Real interest rates are puzzlingly low around the world, European Central Bank board member Isabel Schnabel said on Wednesday, arguing that investors may be overestimating the impact of the Delta variant of the coronavirus on the economy.

With governments and central banks unleashing record stimulus to revive growth after the pandemic, real rates on both sides of the Atlantic would be expected to rise, especially since stocks are soaring, Schnabel, the head of the ECB’s market operations, said.

“The market may be overestimating the risks to the global growth outlook from the spread of the more contagious Delta variant,” she said.

“Delta variant has many characteristics of a genuine supply-side shock, raising prices and lowering output,” she added. “But market analysts’ growth expectations suggest that this shock is widely perceived as being short-lived.”

Copious asset purchases by central banks also keep a lid on real rates but in case of the euro zone, the ECB’s new strategy could be part of the explanation, she added.

The bank unveiled a new inflation target earlier this summer and made it clear that it would not tighten policy until it saw more decisive progress in boosting inflation, a hint that ECB policy will be ultra easy for years to come.

“This will imply a more patient reaction function,” she said. “The market may have started internalising our new forward guidance, especially regarding the conditions that we need to see to start raising policy rates.

(Reporting by Balazs Koranyi; Editing by Toby Chopra)

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