The European Central Bank Has Little Room Left for Further Interest Rate Cuts

The European Central Bank must be cautious with excessive interest rate cuts as borrowing costs are already close to a level that no longer constrains the economy, and a reduction could have a negative effect, according to Executive Board member Isabel Schnabel in an interview with Bloomberg. Officials can continue to ease monetary policy, but they should do so only gradually to avoid lowering rates below the so-called neutral threshold.

– Given the outlook for inflation, I think we can gradually move towards the neutral level if incoming data continues to confirm our core value – Schnabel said, warning against going too far with this.

These remarks are prompting an increasingly intense debate on how the ECB should respond to the deterioration of the eurozone economy with inflation approaching the target level of two percent faster than previously anticipated. Discussions about the pace of easing are becoming heated and further complicated by increased global uncertainty, particularly due to trade tariffs that are likely to accompany the return of Donald Trump to the White House.

Investors expect rates to fall to around 1.75 percent next year, which Schnabel acknowledged is at odds with her own assessment. Economists surveyed by Bloomberg see their decline to two percent in the second half of 2025. Even if inflation were lower, a rate cut could prove counterproductive if underlying economic problems cause a downturn, she warned.

Schnabel stated that she currently does not see a risk of recession, which contrasts with the stance of last week’s assessment by the governor of the Italian central bank, Fabio Panetta, who called for greater focus on the ‘sluggishness of the economy’ and said that rates are likely far from neutral.

– We have a much larger public debt, greater fragmentation, and significant investments are needed to tackle the challenges we face – she said, adding that there is potential for increased productivity due to the AI revolution.

Regarding inflation, Schnabel is confident that it will reach two percent next year, despite still high price pressures in the services sector. Some officials warn that price growth could become too weak if rates remain high for too long, and the governor of the Bank of France, Francois Villeroy de Galhau, said last week that officials will pay close attention to such dangers. Schnabel does not consider this a significant risk and expects that the ECB’s projections for December will show inflation remaining close to the target in the medium term.

Although Trump’s return is another potential problem for the European Central Bank, limited information on what he will actually do means it is too early to draw conclusions, she said. Tariffs would jeopardize growth, but the price implications are less clear, Schnabel concluded, adding that greater protectionism should ultimately have some inflationary effect.