ECB Needs Steady Hand and Mustn’t Overdo Rate Cuts, Schnabel Says

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(Bloomberg) — The European Central Bank needs a “steady hand” and mustn’t lower borrowing costs too much as inflation could turn out to be higher in the future, Executive Board member Isabel Schnabel said.

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“By keeping interest rates near their current levels, we can be confident that monetary policy is neither excessively holding back growth and employment, nor stimulating it,” she said. “We are thus in a good place to evaluate the likely future evolution of the economy and to take action if risks materialize that threaten price stability.”

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Over the medium-term, risks to 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,” she said in a speech at Stanford University on Friday.

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The ECB has reduced rates seven times since June and officials have signaled they’re ready to do more as US President Donald Trump’s trade tariffs threaten to lower growth, with another move looking likely next month.

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Investors are currently pricing in two to three more cuts this year and some economists like Gilles Moec from Axa Group expect even more aggressive easing, unless the trade negotiations resolve quickly and positively.

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However, Schnabel urged caution in her first public remarks since the April reduction and her first in-depth monetary-policy comments in public since February, pouring some cold water on rate-cut expectations.

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Schnabel said that in the current situation, the high level of economic uncertainty, together with the sharp fall in energy prices and a stronger euro “will likely dampen headline inflation in the short-run, potentially pushing it below our 2% target.” In April, consumer-price growth stood at 2.2%.

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But monetary policy should focus on the medium-term, she said. “Given long and variable transmission lags, reacting to short-term developments could result in the peak impact of our policy only unfolding when the current disinflationary forces have passed.”

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She highlighted two factors that could have the size and persistence to pull underlying inflation sustainably away from the ECB’s goal: a rise in public spending and global fragmentation.

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Fiscal policy “is set to expand on a scale unseen outside periods of deep economic contraction,” she said, also highlighting plans by the new German government. “On balance, the fiscal impulse is likely to put upward pressure on underlying inflation over the medium term.”

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On fragmentation and in particular US tariffs she admitted that it’s difficult to assess the implications as negotiations are ongoing. 

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“Overall, however, there are risks that a lasting and meaningful increase in tariffs will reinforce the upward pressure on underlying inflation arising from higher fiscal spending over the medium term,” she said.