ECB’s Schnabel: Upward Trend in R* Could Indicate Where We Need to Go

25 February 2025

By Marta Vilar – LONDON (Econostream) – European Central Bank Executive Board member Isabel Schnabel said on Tuesday that the ECB’s recent research showed r* had moved up in the last few decades, which she said could suggest where policy should go.

In the Q&A session after giving a speech at the BEAR Conference of the Bank of England in London, Schnabel said that ‘what we do know from that study is that r* has probably moved up, which gives us a bit of an indication maybe where we need to go’.

The latest slowdown in data on negotiated wages was ‘going on the right direction’, she said, and stated she was ‘quite confident on that side’.

However, some projections still had to materialise, and services inflation was one of the ECB’s concerns, she said.

Services inflation was ‘still relatively high and we do project that this is going to come down over the course of this year, the same for wages’, she said.

The ECB still had to see that all its projections were materialising ‘and that’s one of the reasons why I think we shouldn’t rush’, she said.

More important was the question of when to stop even if inflation returned to target, she said.

‘That is a very difficult debate, because there is actually not, you know, a simple rule that we can use in order to decide’, she said.

The latest ECB research on r* did not ‘tell us very much’, she said.

‘[T]he range of those estimates is so large that you cannot say anything’, she stated. ‘I mean, some people interpret the note differently, but they probably haven't read the note carefully enough.’

Asked by Econostream what would give her confidence that policy is not restrictive, Schnabel mentioned the Bank Lending Survey and the evolution of domestic demand.

To a question about the extent to which tightening due to QT had any effect on the easing impact of interest rate cuts, she said that ‘in general, I would say the impact of that is comparatively small in any case.’

Schnabel said her approach to where interest rates should go was not completely different from that of her colleagues on the Governing Council.

‘I wouldn't say that … I'm the kind of the one saying [something] that is different for everybody else.’