The European Central Bank (ECB) should exercise caution when lowering borrowing costs, as its current monetary policy might not be hindering the Eurozone’s economic growth, according to Executive Board member Isabel Schnabel.
Schnabel, speaking at the Bank of England’s annual research conference in London, reiterated that the neutral rate of interest, estimated by analysts to be around 2%, could have risen. She argued that the Eurozone’s sluggish economic performance doesn’t necessarily indicate that the current policy is stifling expansion.
“Central banks need to proceed cautiously,” Schnabel stated. “We can no longer say with confidence that our policy is restrictive.”
This statement aligns with Schnabel’s recent hawkish stance on interest rates, contrasting with the views of several of her colleagues on the ECB’s rate-setting panel who are advocating for further rate reductions. Current market expectations point to a terminal rate near 2%, implying three more quarter-point cuts to the ECB’s deposit rate, currently at 2.75%. The first cut is widely anticipated next week, fueled by growing confidence that inflation will return to the 2% target in the coming months, supported by moderating wage growth in the Eurozone.
Bundesbank President Joachim Nagel, speaking earlier on Tuesday, advised a gradual approach to lowering borrowing costs, urging policymakers to avoid hasty decisions and refrain from making predictions about the future path of monetary policy.
Joachim Nagel at a press conference
Latvian central bank Governor Martins Kazaks echoed Nagel’s sentiment, highlighting the difficulty in forecasting the rate path due to unpredictable policy moves from the US. He noted that while the general direction for rates remains clear, President Donald Trump’s actions introduce significant uncertainty. “Of course the uncertainty increases,” Kazaks commented. “That affects the economy, it affects inflation and that affects monetary policy.”
Schnabel also countered the argument, presented last week by fellow Executive Board member Piero Cipollone, that the ECB should consider the monetary tightening effect of unwinding past stimulus measures, known as quantitative tightening (QT), when making decisions. She asserted that it would be “misguided to compensate for higher long-term interest rates resulting from QT with lower short-term rates.”
In conclusion, Schnabel’s remarks highlight a cautious approach to further interest rate cuts within the ECB. While market expectations lean towards further reductions, Schnabel’s emphasis on the uncertain impact of current monetary policy and the potential for a higher neutral rate of interest suggests a more conservative path forward. The ECB’s upcoming decisions will be crucial in navigating the complexities of the current economic landscape and achieving its inflation target.
