Euro zone underlying inflation sticky, ECB’s Schnabel says in Washington

Adds quotes on policy and inflation, background on rate outlook

WASHINGTON, March 29 (Reuters) – Underlying inflation in the euro zone is proving sticky and the recent fall in energy costs may not pull it down as fast as some expect, European Central Bank board member Isabel Schnabel said on Wednesday, highlighting the bank’s chief concern.

Overall inflation in the 20 nations sharing the euro currency is falling quickly but core prices, which exclude volatile fuel and food costs, is still rising, suggesting rapid price growth could prove durable and difficult to break.

Schnabel, head of the ECB’s market operations, said last year’s energy price spike seeped into the broader economy quickly but the reversal may take longer.

“My suspicion is that it is not the case, that it may not drop out as quickly as it moves in,” Schnabel told a National Association for Business Economics conference.

“And it’s not even clear whether it’s going to be completely symmetric in the sense that everything is even going to drop out at all,” she said.

Schnabel said the ECB has some flexibility in reaching its 2% target and did not want to create needless pain by acting too quickly.

“We have a bit of flexibility in our case,” said. “Our target is defined over the medium term, and so of course, we do not want to cause unnecessary pain.”

Conservative policymakers have said underlying inflation is now increasingly driven by domestic factors, particularly more expensive services, and they are wary of wage growth, which at 5-6% lags inflation but remains inconsistent with the ECB’s 2% inflation target.

While the ECB has not provided guidance for its May 4 meeting, chief economist Philip Lane said more rate hikes will be needed if recent turbulence on financial markets dissipates.

The ECB has increased its key deposit rate by 350 basis points to 3% since July.

(Reporting by Howard Schneider; writing by Balazs Koranyi; editing by Chris Reese and David Gregorio)

((Balazs.Koranyi@thomsonreuters.com; +49 30 220 133 623; Reuters Messaging: balazs.koranyi.thomsonreuters.com@reuters.net))

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