ECB’s Schnabel: ‘A Rate Cut in July Does Not Seem Warranted’

17 May 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Friday said that she did not consider an interest rate cut in July justified, and that the ECB should proceed cautiously after a possible first move in June.

In an interview with Japanese financial newspaper Nikkei, Schnabel said, ‘Based on current data, a rate cut in July does not seem warranted. We should follow a cautious approach. After so many years of very high inflation and with inflation risks still being tilted to the upside, a front-loading of the easing process would come with a risk of easing prematurely.’

To increase the ECB’s confidence in inflation converging to the 2% in 2025, it was necessary to see more progress, especially in domestic inflation, she said.

‘Depending on the incoming data and our new Eurosystem staff projections, a rate cut in June may be appropriate’, he said. ‘But the path beyond June is much more uncertain.’

It was important to take sufficient time to ‘to assess how the recovery is proceeding and how monetary policy affects economic growth and inflation’, she said.

Markets were currently pricing around three rate cuts, against six at the beginning of the year, she said, which was evidence of high uncertainty and a reason not to pre-commit to a particular rate path.

There were two main inflation development scenarios to consider, she said. In the first, which was the baseline, the disinflation process would allow the gradual easing of restrictions; in the second, new supply-side shocks would disrupt the disinflationary process, she said.

‘In such a situation, we would need to be more careful, because it could mean that the return to our target is delayed or that inflation even picks up again’, she said. ‘So, we need to see whether the incoming data confirm our baseline scenario. Our aim is to ensure that monetary policy succeeds in containing second-round effects.’

Asked about the neutral interest rate, she said that the ECB would continue to monitor data to access the restrictiveness of monetary policy, adding that ‘the closer we get to a potentially neutral level, and this could be well above 2%, we need to move even more cautiously.’

Geopolitical shocks posed upside risks to inflation and needed to be monitored, she said.