European Central Bank’s Interest Rates

(Reuters) – The European Central Bank (ECB) should halt borrowing cost cuts due to global economic turmoil impacting prices, potentially causing inflation to exceed the 2% target, stated ECB board member Isabel Schnabel on Friday.

The ECB has lowered interest rates seven times in the past year as inflation declines; preparations for another cut on June 5 could bring the deposit rate to 2%.

Schnabel, a known policy hawk, argued against expectations for rate cuts, advocating for maintaining rates as they are low enough to support the economy.

> “Now is the time to keep a steady hand,” Schnabel affirmed at a Stanford University conference. “The appropriate course of action is to keep rates close to where they are today – firmly in neutral territory.”

Financial markets predict a 90% chance of a June rate cut, with further cuts expected later, contradicting Schnabel’s perspective.

Policymakers face the challenge of differing short-term and medium-term inflationary pressures. In the short term, inflation may even fall below the ECB’s 2% target due to lower energy costs, a strong euro, weak economic growth, and uncertainty from the U.S. trade war, Schnabel conveyed.

However, she noted that monetary policy has long-term effects, and by the time further cuts influence the economy, the current inflationary pressures may have shifted.

Upcoming government spending increases, especially Germany’s plans for defense and infrastructure investment, could drive inflation up. Additionally, trade fragmentation from U.S. tariffs may raise costs.

> “Over the medium term, risks to euro area inflation are likely tilted to the upside, reflecting both the increase in fiscal spending and the risks of renewed cost-push shocks from tariffs propagating through global value chains,” Schnabel explained.

Schnabel disputed the notion that U.S. tariffs without retaliation from Europe are deflationary for the euro area.

> “Even if the EU does not retaliate, higher production costs transmitted through global value chains could more than offset the disinflationary pressure from lower foreign demand, making tariffs inflationary overall,” she asserted.

Retaliation, as previously indicated by the bloc, would exacerbate this situation, increasing price pressures further in the future.

By adopting a steady approach, the ECB could effectively manage various potential outcomes, demonstrating a robust strategy adaptable to changing conditions, Schnabel concluded.