ECB Should Hold Rates Steady as Economy Shows Resilience, Says Schnabel

The European Central Bank ought to maintain its current interest rate stance given that the euro zone economy is proving resilient despite U.S. tariffs, while inflation could still turn out stronger than projections, according to ECB policymaker Isabel Schnabel.

The institution, which oversees monetary policy for the 20 nations using the euro, ended a year-long phase of monetary easing in July. Since then, officials have been waiting to assess the complete impact of U.S. tariffs introduced that same month before considering whether further cuts to borrowing costs are warranted.

Schnabel, widely seen as the most influential of the ECB’s hawkish policymakers—those typically inclined to support higher rates—indicated she saw no justification for additional cuts, saying that the current policy rate of 2 percent may already be slightly stimulative for an economy performing better than expected.

“I believe that we may be already mildly accommodative and therefore I do not see a reason for a further rate cut in the current situation,” the German economist told Reuters in an interview.

Market data suggests the ECB is likely to hold rates steady at its upcoming September 11 meeting, but investors continue to bet on another cut by June of next year. According to sources, discussions about resuming monetary easing could re-emerge later in the autumn.

In contrast, the U.S. Federal Reserve is expected to lower rates this month under pressure from President Donald Trump. Yet Schnabel argued that the euro zone economy has outperformed expectations, supported by “robust growth in domestic demand,” and pointed to Germany’s new spending commitments on infrastructure and defense as a “significant fiscal impulse.”

Breaking from the views of several colleagues and even the ECB’s official forecasts, Schnabel maintained that tariffs introduced by the Trump administration would ultimately drive prices upward, regardless of whether the European Union retaliates.

“I continue to believe that tariffs are on net inflationary,” she said. “If you have an increase in input prices globally due to tariffs, and these propagate through global production networks, this will increase inflationary pressures everywhere.”

She noted that tariffs were already disrupting global supply chains, referencing Chinese export restrictions on rare earth materials and a U.S. move to impose duties even on low-value parcels as examples of the ripple effects. Combined with sharply rising food costs, Schnabel said this tilted risks toward stronger price growth: “the balance of risk as being tilted to the upside,” she explained, suggesting inflation could exceed the ECB’s forecast of 1.6 percent for next year and 2 percent by 2027.

Although she stopped short of calling for rate hikes now, Schnabel suggested central banks worldwide might be forced to consider tightening sooner than anticipated. She cited trade barriers, expansive fiscal policies, and demographic trends as potential drivers.

“A more fragmented world with a less elastic global supply, higher fiscal spending and ageing societies is a world with higher inflation,” she said. “So I think the point where central banks around the world start to hike interest rates again may come earlier than many people currently think.”

Schnabel dismissed concerns that Chinese exporters might flood the euro zone with cheap goods as an alternative to the U.S. market, noting that China’s export prices had stabilized and that the cost of Chinese imports into Europe remained low but steady.

She was also unconcerned about the impact of a stronger euro, arguing that exchange rate pass-through to inflation would be limited if the currency’s rise reflected improved euro zone growth prospects. “Therefore, I am less concerned about exchange rate developments,” she remarked.

At the same time, Schnabel said she remained open to revising her stance should there be “material and persistent deviations” from the ECB’s 2 percent inflation target that could unsettle expectations. But she stressed such a scenario was improbable.

“I find it highly unlikely that there’s going to be a de-anchoring of inflation expectations to the downside, especially after these many years of too high inflation,” she said.

“When you look at firms’ selling prices, you don’t see any indication of disinflationary pressures, neither in the manufacturing nor in the services sector.”

By fLEXI tEAM