ECB’s Schnabel: Monetary Policy Cycle Coming to an End, Policy ‘in a Good Place‘

12 June 2025

By David Barwick – BRUSSELS (Econostream) – European Central Bank Executive Board member Isabel Schnabel said on Thursday that the ECB was nearing the end of its monetary policy easing and that policy was well situated at the moment.

In a speech at the House of the Euro, Schnabel said, ‘So as the president said in the press conference, this monetary policy cycle is coming to an end, as medium-term inflation is stabilising around target.‘

Monetary policy in the region ‘has been smoothly transmitted to financing conditions, which are no longer restrictive‘, she said.

Over recent months, bank lending to firms as well as households had ‘picked up quite noticeably‘, showing that conditions were not restrictive, she argued.

‘Overall, in spite of everything that’s happening in the world, when it comes to our monetary policy we are in a good place‘, she said.

Asked whether another rate cut would leave the ECB in a yet better place, Schnabel declined to predict future Governing Council decisions, but noted that previous shocks to the euro area economy had been petering out, leaving monetary authorities now ‘very much focussed on what’s coming next.‘

 With core inflation seen sticking close to 2% over the horizon, policymakers could be ‘quite comfortable‘ with their current stance, she said. The situation was a ‘very clear case of looking through temporary deviations of headline inflation from target‘, she said.

More generally, what had maintained inflation was at base services price pressures, she said, but on this front there had been ‘good news‘ lately, she said. The pressure from this source had ‘more than reversed, so it seems we are well on track‘, she said.

The ‘particularly low‘ inflation projected by the ECB as of early next year was mainly due to weak energy prices, she said. These fed through to inflation quickly and were subject to rapid change, she noted.

The ECB‘s models did not take into account that tariffs acted as a supply-side shock, not just a demand-side one, she said. The effect of a tariff on an intermediate good ‘can basically ripple through the entire global supply chain and then it ends up being inflationary instead of deflationary‘, she said.

Moreover, retaliation for tariffs could lead to a ‘much bigger‘ inflationary effect than there would be in the absence of countermeasures, she said.

‘Another argument that we consider very carefully is this issue of trade diversion from China to the EU‘, she said. However, the latest analysis revealed the magnitude of a trade diversion‘s inflationary impact to be ‘actually rather small‘, she said, namely a cumulative 0.2% over three years.

Still, she acknowledged, ‘models can be wrong‘ and the possibility of goods suddenly being redirected by China to Europe was ‘certainly a concern.‘ However, she added, the EU Commission would probably react to such a redirection if the impact were large.

Schnabel downplayed worries about inflation expectations unmooring. There was ‘no reason to be worried about the dis-anchoring of expectations to the downside‘, she said. ‘At least for now we are very far away from that.‘

That the growth outlook had not changed much was due in part to recent data that ‘surprised us quite significantly on the upside‘, she said. This was ‘only partly‘ due to frontloading, she said.

There had been a ‘notable pickup in private consumption‘, she said, a reasonable development given higher incomes and easier financing conditions. This would be an additional boost to economic recovery, she said.

Tariffs and more expansive fiscal policies were ‘two forces going in opposite directions over the coming years‘, she said. The ECB‘s projections incorporated a ‘relatively conservative estimate‘ of the impact of higher government spending, she said.

It would ultimately depend on the composition of this spending, she said. ‘So it really matters how this money is spent and not just how much money is spent‘, she said.

In other comments, Schnabel observed a ‘recognition that the policies of the US administration might actually be self-harming.‘ This was reinforced by the ‘emergence of a new European growth narrative‘ that had started with the German relaxation of fiscal constraints, she said.