ECB Insight: Schnabel, in Effect, Endorses June Rate Cut

12 May 2025

By David Barwick – FRANKFURT (Econostream) – Granted, European Central Bank Executive Board member Isabel Schnabel would object to our title above, her speech early Saturday (Frankfurt time) during a conference at Stanford University having clearly been meant as a pushback against calls to take euro area interest rates ever lower.

As a pushback, however, it was gentle throughout, always ready to sacrifice tendentiousness for the sake of optionality and strategic ambiguity - which is precisely what ultimately gives rise to our title.

A sentence from her prefatory remarks sums it up very aptly:

‘[T]he most appropriate policy response to the potential risks to price stability arising from fiscal expansion and protectionism is to keep a steady hand and maintain rates close to where they are today – that is, firmly in neutral territory.’

To repeat: ‘a steady hand’, ‘rates close to where they are today’, ‘firmly in neutral territory’.

It all clearly enough adds up to an expression of distaste for a further series of rate cuts, but it also avoids rejecting at least one more reduction. A steady hand need not be completely motionless and ‘close to’ doesn’t mean ‘exactly at’ (and in the current context obviously not ‘above’).

Moreover, it doesn’t require much of a stretch to think that neutral territory, even 'firmly' neutral, could include at least 2%, so 25bp less than today.

Indeed, we suppose it does include 2%. True, we recall that back on February 25, with the DFR still at a lofty 2.75%, Schnabel already affirmed that ‘we can no longer say with confidence that our policy is restrictive.’

However, that assessment was a bit of an outlier at the time, and much has changed since, in particular in the wake of the April 2 tariff announcement.

Wrapping up her intervention, Schnabel only reinforced our perception of an unwillingness to deny that there remains some room yet for rates to decline, warning as she did that ‘an accommodative monetary policy stance would be inappropriate’ and reiterating her desire to see rates stay ‘near their current levels’.

‘Their current levels’, not ‘the current level’ – the choice was surely not casual and is consistent with Schnabel’s reluctance throughout to draw any lines in the sand.

Moreover, she made clear that current rate levels were still defensible, as these amounted to a policy stance that ‘is neither excessively holding back growth and employment, nor stimulating it.’

‘Excessively’? We can picture a speechwriter in the bowels of the ECB agonising over that word. A distinctly more categorical wording would have omitted it; its inclusion suggests to us yet again a conscious desire to allow the continued existence of some policy space to the downside.

As for the rest of the speech, namely the characteristically cogent argumentation, one can find repeated examples fitting our forgoing interpretation, but that would be coals to Newcastle.

We are thus left with our provocative title, which we find does not require too much editorial license.

Still, to be clear, what we characterise as Schnabel’s endorsement of a June cut is of course no enthusiastic embrace of further easing. It is more an implicit recognition that rates are going at least a bit lower, and whether this be ideal or not, the situation does not warrant standing too clearly athwart the tide.