ECB’s Schnabel Warns Against Cutting Rates Into Accommodative Territory

27 November 2024

By Marta Vilar – MADRID (Econostream) - European Central Bank Executive Board member Isabel Schnabel said on Wednesday that the ECB should be wary of cutting rates into accommodative territory.

In an interview with Bloomberg, Schnabel said, ‘Given the inflation outlook, I think we can gradually move toward neutral if the incoming data continue to confirm our baseline,’ but warned ‘against moving too far, that is into accommodative territory.’

For Schnabel, the neutral rate was in the range of 2-3% and thus might not be so far from current interest rate levels.

Acknowledging that the market thought the ECB would need to move into accommodative territory, she said, ‘From today’s perspective, I do not think that would be appropriate.’

Schnabel rejected 50bp cuts in favour of a ‘gradual approach’.

Reaching accommodative territory under the current circumstances could be entail more costs than benefits, she said.

‘We would use valuable policy space that will be needed in the future when the economy is facing shocks that monetary policy can deal with more effectively,’ she said.

Recent European PMIs might exaggerate the scale of the economic weakness, she said.

‘Consumption in the third quarter, as far as we can tell on the basis of the available data, was stronger than expected’, she said. ‘We see some evidence of a consumption-driven recovery in the data. This gives me confidence that this narrative remains plausible.’

Inflation could remain ‘bumpy’ in 2025 so we should not be too focused on when the target is met precisely, she said.

Schnabel did not see a significant risk of undershooting due to slow growth and said that the December projections would show inflation remaining near the 2% target also in the medium term.

It was too soon to comment on US President-elect Donald Trump's potential tariff hikes as it was not yet known what he would do, she said.

Tariffs would impact growth, but the effects on inflation would not be as clear, even if there would be some inflationary impact, she said.