ECB’s Schnabel Leaves Option for Further Rate Cuts Open, Reports Reuters

By Balazs Koranyi

TALLINN (Reuters) – Inflation in the Eurozone is declining as anticipated, which reduces the likelihood that further interest rate cuts could disrupt disinflation efforts. However, the European Central Bank (ECB) must proceed with caution as rates decrease, according to ECB board member Isabel Schnabel.

The ECB is expected to implement another interest rate cut next month due to decreasing price pressures. Schnabel’s remarks are likely to support this expectation, given that the bank’s baseline already predicts two additional rate cuts this year following the initial reduction in June.

“Recent data align with the baseline scenario that anticipates inflation will sustainably return to our 2% target by the end of 2025,” Schnabel stated during a lecture in Tallinn, Estonia.

While she did not explicitly advocate for policy easing, Schnabel suggested that gradual rate cuts might not impede the disinflation process as some policymakers had feared. “With signs indicating a potential slowdown in economic momentum in other regions, the chances of a moderate and gradual reduction in policy constraints derailing the path to price stability are reduced,” Schnabel noted.

Olli Rehn, the governor of the Finnish central bank, echoed Schnabel’s sentiments, suggesting that slower economic growth supports the case for a September rate cut. Latvia’s Martins Kazaks agreed that the baseline remains on track.

Nonetheless, Schnabel, who has played a key role among more hawkish policymakers responsible for the ECB’s most significant series of interest rate hikes in 2022-23, emphasized the need for caution as rates decline. She acknowledged that few understand where monetary restriction transitions to stimulation.

“The closer policy rates approach the upper estimates of the neutral interest rate, the more cautious we should be because of the uncertainty regarding how restrictive our policy is,” Schnabel asserted. She also indicated that quarterly rate adjustments might be more suitable moving forward.

“To make policy resilient against these risks requires a comprehensive review of the main assumptions underlying our policy approach,” she advised, noting that such a review is conducted every three months.

Schnabel downplayed the likelihood of an economic downturn, contending that a “soft landing” remains more probable than a recession. Part of her cautious outlook is driven by concerns that inflation could rebound if economic conditions change unexpectedly.

“While surveys indicate weaker wage growth on the horizon, the staggered nature of wage negotiations may delay the recovery of workers’ purchasing power longer than expected,” Schnabel remarked.

She also highlighted that wage growth could stay elevated due to a tight labor market, where an imbalance between labor supply and demand could challenge the ECB’s view that wage growth is solely a corrective response to past inflationary impacts on purchasing power. Additionally, the anticipated rebound in productivity appears to be lagging, and sluggish productivity growth, potentially worsened by trade tensions, could further exert pressure on wages, Schnabel concluded.