ECB’s Schnabel: Barring Large Shocks, “No Reason to Adjust the Policy Stance”

2 September 2025

By David Barwick – FRANKFURT (Econostream) – European Central Bank Executive Board member Isabel Schnabel on Tuesday said that she saw no justification for lowering ECB interest rates further unless a major shock occurred, arguing that policy was already appropriately accommodative and that medium-term inflation was expected to remain at target even in the face of global uncertainties.

“At the current juncture, I see no reason to adjust the policy stance in either direction,” Schnabel said in an interview with Reuters. “Interest rates are in a good place. Medium-term inflation is projected to be around 2% and inflation expectations are anchored. We are at full employment and the economy is growing around trend.”

Schnabel acknowledged that market pricing still suggested one additional rate cut, but dismissed the significance of a marginal adjustment. The impact of one more cut was beyond models' ability to distinguish, she said.

“I believe that we may be already mildly accommodative and therefore I do not see a reason for a further rate cut in the current situation,” she said.

In a “shock-prone world” the ECB could not fine-tune inflation to be exactly 2% at all times, she said. The ECB should limit its reactions to “material and persistent deviations of inflation from target that threaten to destabilize expectations,” she said. “We can tolerate moderate deviations … in either direction.”

“So, in the absence of large shocks, I see no reason to adjust the policy stance,” she added.

Incoming data confirmed the “quite remarkable” resilience of the euro area economy, she said, with growth of about 0.3% per quarter over the past year and a half broadly matching potential. Robust domestic demand, supported by easier financing conditions, had offset weaker net exports, while reduced trade uncertainty and a significant fiscal impulse should lend further support ahead.

Inflation was “developing broadly as expected” at around 2%, she said, with short-term volatility driven by energy base effects and government measures. More important was the medium-term path, which both ECB projections and surveys suggested was increasingly centered on target.

Still, Schnabel said risks to inflation remained tilted upward. She cited elevated food prices, the potential inflationary impact of tariffs, and fiscal support that could push up prices if capacity constraints were hit. She also warned that supply-side shocks and global production bottlenecks were not well captured in standard models but could fuel inflationary pressures.

Asked about exchange-rate developments, Schnabel downplayed recent euro appreciation. Historically the moves were not large, she said, and the pass-through of a stronger currency into consumer prices was likely smaller than standard elasticities suggest, particularly when appreciation reflected stronger relative growth.

Concerns that higher U.S. tariffs might prompt China to dump goods on Europe were not borne out so far, she said, noting that Chinese export prices had recovered and were rising again in some sectors. The share of Chinese consumer goods imports in Germany was too small to have a first-order effect, she added.

On wages, Schnabel said negotiated pay had plateaued at an elevated level but was decelerating slightly, with forward-looking indicators pointing to further moderation. Wages nevertheless remained a key cost driver for services firms, she said.

Schnabel cautioned that the global impact of tariffs was still unfolding and expected U.S. inflationary pressures to increase as firms exhausted inventories and passed on costs. But she argued that euro area resilience so far suggested no need to alter the ECB’s course.

She emphasized the importance of central bank independence, warning that political interference with the U.S. Federal Reserve could be disruptive for global markets, though the ECB was strongly protected by European treaties. Capital flows after the April tariff shock demonstrated investor trust in the euro and in the ECB’s independence, she said.

A less elastic global supply, higher fiscal spending and aging populations meant inflation pressures were more likely to rise than fall, Schnabel said, suggesting that central banks could return to tightening earlier than many expect.