ECB Insight: Schnabel Comments Support Placing Market Bets Very Cautiously

19 February 2025

By David Barwick – FRANKFURT (Econostream) – Here are some aspects of the interview of European Central Bank Executive Board member Isabel Schnabel with the FT, published Wednesday, that we regard as particularly significant:

For me, that direction for R* now is upwards again. Somewhat oddly, the section on R* starts the interview off. If anything, we think giving such attention to the entire idea of R* at this point only muddies the water, just as the ECB was trying to lay to rest the idea that the notion could drive policy decisions. In terms of the ECB’s next decisions, we can sum up Schnabel’s views with a couple of her own comments, e.g. that R* ‘has no impact on any individual rate decision’ and is relevant for ‘our medium-term thinking’. That’s good, as we don’t see how the concept could carry much weight, the details being so vague in her telling. Still, she also says that ‘[i]f you believe that R* has moved up, this argues for a more cautious approach.’ One could be forgiven for finding all this a bit contradictory. And as for her criticism of markets’ focus on the relatively narrow R* interval of 1.75% to 2.25% mentioned by recent ECB research, the ECB has itself to thank for the obsession with this particular band, its president, Christine Lagarde, having implicitly endorsed it. All in all, and hopefully not unfairly, we put this argument in a category with Executive Board member Piero Cipollone’s suggestion yesterday that rate cuts should take into account the tightening impact of QT: as we get closer to the end of the journey, it is natural for the different camps to spring new arguments backing their respective case. Based on Econostream’s conversations with policymakers, Schnabel’s is more likely to gain traction.
[W]e can no longer say with confidence that our monetary policy is still restrictive. And yet, we, or rather Lagarde, did just that at the last press conference (‘[L]et’s face it: we are currently restrictive.’). To his credit, the interviewer did not let the apparent contradiction slip by unnoticed. To which Schnabel replied that the monetary policy statement of 30 January (and presumably Lagarde’s subsequent reinforcements thereof) applied to the 3% interest rate preceding the decision of that day. Even though the decision to cut to 2.75% did not formally take effect until 5 February, Schnabel’s objection seems a bit contrived to us. Most observers probably assume that the monetary policy statement takes into account the decision that precedes it and would make references to the past clear, which the assertion of continued restrictiveness does not, in addition of course to coming after the rate announcement. But it doesn’t matter too much and we would not wish to overstate the significance of her view of the current stance. Governing Council members who consider policy still restrictive today remain in the majority, and Schnabel’s doubts to the contrary merely confirm that the ECB is, as one would expect, getting closer to having to decide whether interest rates need to become downright accommodative. It is no surprise on which side of that debate Schnabel will be found.
One of the important data sources in this context [of restrictivness] is the bank lending survey. It is no secret that the ECB is paying particularly close attention to this information. Vice President Luis de Guindos two weeks ago called the BLS ‘a much better indicator of the restrictiveness of our monetary policy’, and we reiterate here that if the next one, due two days before the 17 April rate decision, shows clear improvement, then the ECB will have to reassess its view of the restrictiveness of its stance.
That [whether the ECB should drop the reference to restrictiveness] is a discussion we should have in the next meeting. There are naturally different views on this among Council members, and while we think a discussion on 6 March is inevitable, we would be hesitant to call the outcome. Still, some change seems likelier than none, notwithstanding Schnabel’s dubious suggestion that the relevant language is actually backward-looking.
‘[W]e are getting closer to the point where we may have to pause or halt our rate cuts.’ On the one hand this is a truism. On the other, the devil is in the details, but Schnabel is exceedingly careful not to suggest when that point will be reached, preferring to ‘leave that to your interpretation.’ More important is thus her belief that ‘we need to start that discussion’, meaning, we assume, in two weeks. While things can naturally happen that would lead to a terminal rate of 2.5%, this is not the base case of most Council members, to whom 6 March may seem early to start discussing the end, especially under such extreme uncertainty. It is true that Schnabel notes that ‘markets are not entirely sure either’ whether to expect an April cut, and indeed April, with the absence of new projections and rates presumably at 2.5%, would seem a logical first opportunity to pause and take stock of things. Under the current extreme uncertainty, however, we would be very hesitant about interpreting Schnabel to mean that such an outcome is likely. We don’t think anyone can know. At the same time, precisely given said uncertainty, a word of caution makes sense, and this is how we understand her comment about April.
‘[F]or me, the direction of travel is not so clear anymore.’ We can’t actually recall that she was ever given to using this phrase, which Econostream has always found a bit questionable anyway. That she would explicitly reject it now is completely consistent with and indeed an inescapable conclusion of the rest of the interview.

All in all, Schnabel’s latest comments are a highly welcome addition to those of de Guindos two weeks previously. We wrote at the time that while we were still convinced of a cut on 6 March, we were ‘marginally more sceptical of our own earlier view that an April cut can be assigned a strong likelihood and one in June a decent probability.’

Schnabel’s remarks today do not substantially change that shift in our sentiment in any direction. They amply confirm it.