ECB May Consider Pausing or Ending Interest Rate Cuts, Schnabel Says
The European Central Bank (ECB) may soon discuss pausing or discontinuing its interest rate reduction campaign, according to Executive Board member Isabel Schnabel.
Schnabel, known for her hawkish views, stated in a recent interview that the ECB is approaching a point where it may need to halt further rate cuts. She emphasized the need to initiate these discussions.
As a step towards this, she suggested that officials debate at their March meeting whether to remove language from their post-decision statement indicating that monetary policy is still constraining the eurozone economy.
While acknowledging that monetary policy remains restrictive, Schnabel expressed uncertainty about its ongoing effectiveness.
Traders have reduced their bets on further ECB easing following Schnabel's comments. Investors now anticipate an additional 72 basis points of cuts in 2025, down from 76 basis points before her statement.
A sixth cut in borrowing costs since June is expected next month, but decisions beyond that will likely become more challenging.
Analysts predict that borrowing costs could fall to as low as 1.75% in 2026.
The neutral rate, a theoretical level that neither stimulates nor restricts demand, is being considered by some economists as a potential guide. The ECB estimates neutral at 1.75%-2.25% but cautions against overreliance on this concept.
Inflation rose to 2.5% in January. While it is projected to reach the target sustainably in 2025, energy costs and potential US trade tariffs could potentially delay its achievement. A sluggish economy could also contribute to reduced consumer price growth.
Schnabel acknowledged that risks to the ECB's inflation outlook are tilted somewhat upwards, primarily due to energy price volatility. Services inflation and wage growth remain elevated, and while projections foresee a decrease, these trends need to materialize.