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ECB’s Schnabel Says Too Early to Discuss Interest-Rate Cuts

ECB’s Schnabel Says Too Early to Discuss Interest-Rate Cuts

Talk of lowering European Central Bank borrowing costs is premature at this stage, Executive Board member Isabel Schnabel said. 

“It is too early to discuss rate cuts,” she said in a Q&A session on X. “We will keep our key policy rates at restrictive levels until we are confident that inflation sustainably returns to our 2% target. This requires additional data confirming the disinflationary process.”

The ECB has kept rates on hold at its last two meetings as it assesses the impact of its tightening campaign on the economy. Investors have been betting that the first cut will come in the spring — a prospect that several officials have dismissed as too soon.

European Central Bank

@ecb

????????@Isabel_Schnabel: It is too early to discuss rate cuts. We will keep our key policy rates at restrictive levels until we are confident that inflation sustainably returns to our 2% target. This requires additional data confirming the disinflationary process. #AskECB
Schöpfungsplan@AlleundKeinen
Replying to European Central Bank@ecb Isabel Schnabel ????????????????@Isabel_Schnabel
The market is pricing cuts in 2024 pretty aggressively. Yet the ECB forecasts predict core inflation above 2% for the entire year. At which level inflation would have to either realize or be forecasted at, for the ECB to start cutting this year. Thank you

http://twitter.com/AlleundKeinen/statuses/1743276347365978591

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Addressing a question about the differing outlook between policymakers and investors, Schnabel said she doesn’t see a lack of credibility on the part of the central bank.

“There can be different views on future economic developments and the inflation outlook,” she said.

The Executive Board member also highlighted that “financial conditions have loosened more than projected,” explaining that this easing is linked to expected rate cuts.

Turning to the economy, Schnabel said that the euro-area economy faces subdued prospects even if the worst of the downturn may be over.

“There is evidence that sentiment indicators are bottoming out, but the near-term economic outlook remains weak in line with our projections,” she said.

That chimes with comments from ECB Vice President Luis de Guindos earlier on Wednesday, who said that output in the euro area probably continued contracting at the end of last year, producing a shallow recession.

Inflation has slowed dramatically, reaching 2.4% before a December rebound that reflected the withdrawal of government aid to deal with higher energy costs. The retreat is expected to continue this year, though at a slower pace than in 2023.

“Inflation has eased but underlying price pressures remain elevated,” Schnabel said. “Policy rates need to be sufficiently restrictive for as long as necessary to ensure that inflation sustainably returns to 2%. A slowing economy is part of monetary policy transmission.”

Read More on the ECB:
Euro Zone May Have Ended 2023 in Recession, Guindos Says

ECB’s Villeroy Reiterates That Rates Will Be Cut This Year

Eur-Zone Unemployment Hits Record Low, Defying Recession Gloom

Schnabel also said:

  • “Our projections foresee inflation reaching our 2% target in 2025. So we are on the right track. Geopolitical tensions are one of the upside risks to inflation as they could drive up energy prices or freight costs. That’s why we need to remain vigilant”
  • “The drop in unemployment to a historical low confirms continued strong resilience in labor markets, which is broadly in line with the December 2023 staff projections. As inflation falls, we continue to expect a gradual decline in wage growth in 2024”
  • “The new fiscal rules are a step in the right direction. They are less procyclical, use a differentiated approach across member states and acknowledge the importance of public investment. However, the new framework lacks a central fiscal capacity”
  • “We should intensify efforts to green our lending operations, including the collateral framework. First steps are already being taken. Green targeted lending operations could be considered when monetary policy needs to become expansionary again”
  • “The need for higher private and public investments due to the green transition as well as digitalisation and geopolitical shifts may lead to the neutral rate being higher than before the pandemic”

Gallery

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