(Bloomberg) -- One of the European Central Bank’s most hawkish officials said inflation is showing a “remarkable” slowdown, a U-turn prompting markets to ramp up bets on an interest-rate cut as early as March.

Executive Board member Isabel Schnabel, speaking in a Reuters interview, said that the consumer-price data released last week now make another hike in borrowing costs “rather unlikely,” and refused to be drawn on the prospect that a reduction could even transpire within six months.

Money markets ramped up bets on faster and deeper rate cuts after the comments, almost fully pricing a quarter-point drop by March and 150-basis-points of decreases by the end of next year. The odds of a move in the first quarter were almost zero three weeks ago, while late last month only three quarter-point cuts were priced for next year. 

Schnabel spoke days after a report showed euro-area inflation slowed to 2.4%, far lower than economists had anticipated and approaching the ECB’s 2% target. So-called core price growth — which strips out volatile elements such as energy — has also retreated. 

“The November flash release was a very pleasant surprise,” she said according to a transcript of the Dec. 1 interview published Tuesday on the ECB’s website. “Most importantly, underlying inflation, which has proven more stubborn, is now also falling more quickly than we had expected. This is quite remarkable. All in all, inflation developments have been encouraging.”

Just a month ago, after October data also showed slowing price growth, Schnabel had cautioned that it’s too early to rule out another rate hike and compared the fight to bring inflation to the target with overcoming the last mile in a long-distance run. 

When asked if she’d changed her view, she cited a famous quote by economist John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?” 

While effectively ruling out another rate hike, she was less specific on the prospect of the cut that traders are betting on. 

“We have to see what’s going to happen,” she said. “We have been surprised many times in both directions. So, we should be careful in making statements about something that is going to happen in six months’ time.”

Mirroring comments on Monday by Vice President Luis de Guindos, she also cautioned that “we must not declare victory over inflation prematurely.”

“We continue to expect an uptick over the coming months,” Schnabel said. “There’s going to be a reversal of some fiscal measures and of some base effects, and we cannot exclude that there’s going to be a new price spike in energy or food.”

Bundesbank President Joachim Nagel has struck a similar tone, warning that geopolitical tensions could also stoke price pressures. 

Adding to the case for caution, 1-year consumer expectations for euro-zone inflation stayed at 4% in October, matching the five-month high in September. Looking three years ahead, they held steady at 2.5%. 

Questioned on the state of the economy, Schnabel observed that some of the “hard data” at present aren’t great, while other indicators “are giving us hope.”

Numbers released on Tuesday looked ominous. Production fell in France and Spain in October. Equivalent reports in Italy and Germany are due on Thursday, but if enduring and reflecting more broadly, such weakness could raise the prospect of a recession in the euro region after gross domestic product shrank in the three months through September.

Policymakers are expected to keep rates on hold for a second time when they meet on Dec. 13-14. They’ll also present new economic forecasts that will stretch out to 2026 for the first time. 

UBS economists led by Reinhard Cluse said in a note on Monday that the ECB will probably have to lower its outlook for growth and inflation in 2023 and 2024. 

The ECB is currently set to reinvest maturing bonds from the €1.7 trillion ($1.8 trillion) pandemic emergency portfolio until the end of 2024. Several officials have pushed to revisit that stance, however, as the economy overcomes lingering pandemic effects and bond reduction proceeds only slowly. 

A key feature of the so-called PEPP reinvestments is that they can be deployed flexibly across jurisdictions, acting as the first line of defense against gyrations on euro-area bond markets. 

“As President Lagarde mentioned, the Governing Council is going to discuss reinvestments under the PEPP in the not-too-distant future and I’ll leave it up to you to interpret what that means,” Schnabel said. 

She insisted that any decision wouldn’t be a “big deal.”

“It’s clear that discussion is going to come,” Schnabel said. “It’s also clear that at some point we’re going to fully end PEPP reinvestments. The amounts involved are relatively small and markets are expecting this to happen.”

--With assistance from Alice Gledhill, Alexander Weber and William Horobin.

(Updates with inflation expectations in 12th paragraph)

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