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A top European Central Bank official has signalled that rate-setters could be almost done with interest rate cuts in the Eurozone, warning risks to inflation were increasingly becoming “skewed to the upside” while borrowing costs had eased a lot.
The currency area’s monetary guardian has cut interest rates rapidly since the summer and is widely tipped to do so again when its governing council meets in early March, amid signs of weak growth.
But ECB hawk Isabel Schnabel, a member of the six-person executive board which sets the tone for rate meetings, told the Financial Times that the central bank should “now” start to debate a “pause or halt” to rate cuts.
The remarks highlight rising tensions within the ECB over the economic outlook and mark the strongest sign yet that some of the 26 members of the governing council believe that they soon need to slow down — or even stop — rate cuts.
“The data are showing that the degree of restriction has come down significantly, up to a point where we can no longer say with confidence that our monetary policy is still restrictive,” Schnabel said, adding: “We now have to start the discussion on how far we should go. I’m not saying that we’re there yet. But we have to start the discussion.”
Financial markets are pricing in three more quarter-point rate cuts by the end of the year — in part because ECB president Christine Lagarde said in late January after the central bank’s most recent cut that it was “entirely premature” for rate-setters to consider changing course.
Banque de France governor François Villeroy de Galhau this month warned that US President Donald Trump’s protectionist trade policies were likely to drag down activity in a region where growth is already weak.
While Schnabel supported lowering rates last month, she said that, for her, “the direction of travel is not so clear any more”.
Schnabel noted that investors were not fully pricing in another quarter-point cut at the ECB’s April meeting. “So markets are not entirely sure either,” she said. As of Tuesday afternoon, markets attached a 60 per cent chance of a rate cut at the April vote.
The ECB has lowered borrowing costs by 125 basis points since June, with interest rates now at a two-year low of 2.75 per cent. Annual inflation meanwhile, has risen slightly since the autumn, hitting 2.5 per cent in January.
It has now been above the central bank’s 2 per cent goal for three months.
Schnabel warned that domestic inflation was “still high” and wage growth was “still elevated”, amid “new shocks to energy prices”.
She was “no longer sure” that Eurozone borrowing costs were constraining demand and dampening inflation.
“I’m not saying our monetary policy is no longer restrictive [to growth],” Schnabel said. “What I’m saying is I’m no longer sure whether it is still restrictive.”
Analysts’ focus on a recent update of ECB staff estimates of the neutral rate — at which demand is neither boosted, nor constrained — was “misleading”, she said.
The neutral band moved from between 1.75 per cent and 3 per cent to between 1.75 and 2.25 per cent, which analysts have interpreted as giving the ECB a lot more room to cut borrowing costs.
“We know that we know very little [about the neutral rate],” she said, adding that these fresh estimates were “not well-suited” for day-to-day policymaking.
Schnabel said the central bank should also put more emphasis on upside risks to inflation in its forthcoming strategy review, saying its existing framework came “from a different world” — one where price pressures were much too weak.
“Looking forward, we should be putting equal weight on risks in both directions,” she said.
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