Exclusive: ECB’s Schnabel: ‘The Bar for Another Rate Cut Is Very High’

11 July 2025

By Marta Vilar and David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Wednesday firmly rejected calls for further monetary policy easing in the euro area and downplayed concerns about the euro’s exchange rate strength.

In an interview with Econostream in her 39th-floor office (transcript here), Schnabel readily confirmed that the case for another Governing Council rate cut had continued to weaken. With disinflation ‘proceeding broadly as expected’, interest rates were ‘in a good place, and the bar for another rate cut is very high’, she said.

There was ‘no risk of a sustained undershooting of inflation over the medium term’, she said, given core inflation seen at target throughout the ECB’s projection horizon.

‘The low energy price inflation is likely to be temporary, and the fear of the exchange rate appreciation putting downward pressure on underlying inflation is exaggerated in my view, as the pass-through is likely to be limited’, she said.

The limited pass-through reflected the root causes of the euro’s firmness, which stemmed partly from increased confidence in European prospects against the backdrop of a ‘new growth narrative’, she said.

Related to this, she reasoned, ‘you see a rebalancing of investors into the euro area, which tends to lower financing costs, counteracting the tightening effect of the exchange rate.’

More than half of euro area imports were billed in euros anyway, and it was no given that firms benefitting from exchange rate developments would correspondingly reduce the prices they charged, she said.

The debate about the strong euro was thus overdone, she said, observing that no equivalent discussion had taken place when the common currency was approaching parity with the dollar early in the year and the ECB was cutting interest rates.

The ECB did not target the exchange rate or respond to any predetermined level, she reminded.

Asked whether further appreciation was manageable indefinitely, as long as reasonably gradual, she declined to make ‘very general statements about what could happen’, but confirmed that ‘[a]t the moment, it's manageable.’

As for the larger question of the euro’s international role, the US was in danger of sacrificing at least some of the ‘exorbitant privilege’ accruing to it thanks to the dollar’s unique standing, she said.

‘This offers a historical chance for the euro area to foster the international role of the euro as a global reserve, invoicing and funding currency, to reap some of those benefits’, she said.

At the same time, she expressed confidence in the ability of the US Federal Reserve to withstand the onslaught of US President Donald Trump on its leadership. The Fed was ‘leading by example’ in standing up to attacks on its independence, she said.

‘It’s very dangerous when you have direct interference by governments in monetary policy, because this can destroy the trust that has been built over decades’, she cautioned. ‘Overall, I would never underestimate the institutional resilience of the Fed, so I remain optimistic.’

Turning to the euro area economy, Schnabel said that its resilience was evident, exemplified by upside surprises in sentiment indicators like last month’s composite PMI or the striking, months-long improvement of forward-looking indices for manufacturing.

‘This suggests that we’re seeing more than just frontloading’, she said.

The persistent robustness of job markets pointed to a weaker-than-expected dampening effect of uncertainty, she said. Meanwhile, fiscal developments going forward would provide additional support, she noted.

‘So overall, the risks to the growth outlook in the euro area are now more balanced’, she said.

That being the case, further policy easing by the ECB was hard to justify, she made clear.

‘There would only be a case for another rate cut if we saw signs of a material deviation of inflation from our target over the medium term’, she said. ‘And at the moment, I see no signs of that.’

Schnabel dismissed risk management arguments, citing still-elevated domestic price pressures as well as household and firm inflation expectations still marked by previously high inflation.

Global economic fragmentation and increased government spending would be sources of additional upside risks to inflation ahead, she cautioned.

‘Therefore, from today’s perspective, a further rate cut is not appropriate’, she said.

Fine-tuning policy based on incoming information would be dangerous, she said, pointing to the latest oil price gyrations as an example. The ECB should thus continue to prioritise medium-term inflation and core inflation, she said, observing that the revised strategy calls for agility while allowing leeway for moderate deviations from target as long as expectations are seen remaining anchored.

The new Emissions Trading System, a market-based mechanism for reducing greenhouse gas emissions, was subject to uncertainties that also supported focussing on core inflation, ‘acknowledging that whatever happens with respect to energy … may feed into core inflation, especially when prices rise’, she said.

With respect to the ECB’s commitment in the context of its recently concluded strategy assessment to act forcefully and persistently in response to large, sustained inflation deviations, Schnabel underscored the importance of quickly recognising changes in the inflation environment.

This, she suggested, involved paying ‘a lot of attention to inflation expectations’, including not just market-based expectations, but ‘a broad set of indicators, including household and firm inflation expectations.’

Whereas data-dependence had once essentially meant cross-checking incoming data with inflation projections, it now meant ‘using incoming data to assess whether there could be a sustained deviation of inflation from target over the medium term’, she said.

Schnabel echoed the optimism expressed earlier in the week by Bundesbank President Joachim Nagel about the outlook for the German economy.

‘We see a clear turnaround in sentiment in the German economy’, she said. ‘But now the German government has to deliver. I see a chance to escape low growth, and this chance should not be wasted.’

The relaxation of the fiscal constraints Germany had previously imposed on itself could, if implemented correctly, lead to higher potential growth from which the entire euro area would benefit, she said.

‘This may go along with higher interest rate costs, but if potential growth increases at the same time, this is manageable’, she said.

The shift in Germany’s fiscal stance would not necessarily blur the traditional divide between the region’s more frugal countries and their less restrained neighbours, she said.

‘Germany is in a very different position from countries like France and Italy’, she said. ‘Those countries are facing much more difficult decisions. When they want to increase defence spending as foreseen, they will have to reduce their spending elsewhere, which is politically very demanding. So, I think the difference in the fiscal situations is still there.’