European Central Bank May Consider Pausing Interest Rate Cuts
The European Central Bank (ECB) may soon discuss pausing or ending its interest rate reduction campaign, according to Executive Board member Isabel Schnabel.
Schnabel, known as one of the ECB's top hawks, stated that the bank is approaching a point where it may need to pause or halt rate cuts. She emphasized the need for a discussion on this matter.
As a step towards this, Schnabel suggested that ECB officials debate removing language from their post-decision statement at the March meeting, which currently indicates that monetary policy is still restraining the eurozone economy.
"I'm not saying our monetary policy is no longer restrictive," Schnabel clarified. "What I'm saying is I'm no longer sure whether it is still restrictive."
Following Schnabel's comments, traders decreased their bets on further ECB easing. Investors now anticipate 72 basis points of cuts in 2025 compared to 76 basis points before her statement. This led the euro to trim its decline against the dollar, trading around $1.043.
While a sixth cut in borrowing costs since June is widely expected next month, decisions beyond that are likely to become more complex. Some officials advocate for additional support to the sluggish European economy to prevent inflation from falling below the 2% target. However, others argue that monetary easing should not mask underlying economic weaknesses.
Analysts surveyed by Bloomberg believe borrowing costs could potentially fall to as low as 1.75% in 2026. Some consider the neutral rate, a theoretical level that neither restricts nor stimulates demand, as a guide. The ECB estimates neutral within a range of 1.75%-2.25% but cautions against excessive reliance on the concept. The current deposit rate stands at 2.75%.
"The natural rate of interest is an important theoretical concept," Schnabel acknowledged. "But it's not well-suited to determine the appropriate monetary-policy stance."
Inflation rose to 2.5% in January. While it is still projected to reach the target sustainably in 2025, rising energy costs and potential US trade tariffs could at least delay this. A sluggish economy may also drag down consumer price gains. Eurozone output grew only 0.1% in the final quarter of 2024, with meager expansion expected at best this year.
Schnabel expressed concern that risks to the ECB's inflation outlook are tilted somewhat to the upside, citing potential dangers from energy prices.
"Both services inflation and wage growth are still at an uncomfortably high level," she noted. "Our projections foresee a deceleration of both. But this still needs to materialize."