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ECB board member Schnabel suggests potential end to interest rate increases

Estimated reading time: 3 minutes

ECB board member Isabel Schnabel suggested that further interest rate increases might no longer be necessary due to a significant decrease in inflation, in an interview with Reuters.

Schnabel’s perspective represents a change in her previously hawkish stance, notably impacting investors’ expectations regarding future rate cuts.

Last month, eurozone inflation dropped to 2.4%, a substantial decline from over 10% the previous year, following 10 consecutive rate hikes. This decline has brought the European Central Bank’s (ECB) inflation target of 2% closer, leading to some reevaluation of the need for continued aggressive rate policies.

Schnabel, who previously advocated for maintaining the option of rate hikes, cited recent encouraging inflation data as the reason for her change in view. 

Calling upon economist John Maynard Keynes, Schnabel stated, “When the facts change, I change my mind. What do you do, sir?” She added that the latest inflation figures make further rate hikes unlikely.

Investors reacted to Schnabel’s comments by adjusting their expectations, now foreseeing 142 basis points in rate cuts next year, an increase from the previous day’s projection of 130 basis points. The anticipated timing for these cuts has also been brought forward, potentially as early as March.

German 10-year bond yields also experienced a significant fall, reaching their lowest point since June, indicating strengthened expectations of an ECB policy shift.

Schnabel also cautioned against making long-term predictions about interest rate movements, referencing the unpredictable nature of inflation trends. She highlighted the risks of committing to a certain policy path too far in advance.

Other ECB figures, including President Christine Lagarde and the heads of the French and Greek central banks, have indicated steady rates for the coming quarters, contrasting with market expectations of a rate cut in the near future.

Schnabel’s comments mark a departure from the views of other ECB hawks, such as Bundesbank Chief Joachim Nagel, who maintains that a rate hike remains possible. However, Schnabel emphasized the need for caution, given the prolonged period of above-target inflation.

Despite the rapid decline in headline inflation, Schnabel stressed the importance of continued vigilance in the fight against inflation, particularly focusing on underlying inflation and wage growth trends. She warned of a potential increase in inflation due to the expiration of budget subsidies and the base effect of high energy prices.

In her assessment of the economic impact of the ECB’s rate hikes, Schnabel noted that they have aided in controlling inflation, and she anticipates a recovery rather than a prolonged recession, supported by recent survey data.

On the topic of the ECB’s Pandemic Emergency Purchase Programme, Schnabel said that ceasing reinvestments in the programme is not a major concern, given the low volumes of purchases and market expectations for its eventual conclusion.

This story was first reported by Reuters.

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