ECB “hawkish” Schnabel: Relieved by expectations of “interest rate hikes”, Eurozone economic resilience is supported

The Zhitong Finance App learned that ECB Executive Committee member Isabelle Schnabel said she was “quite relieved” that investors are betting that the ECB's next interest rate action will be to raise interest rates. Schnabel said that although borrowing costs are already at an appropriate level “for some time” (unless there is a further impact), significant increases in consumer spending, corporate investment, and government spending on defense and infrastructure will support the economy.

“Both market and survey participants expect that the next interest rate action will be to raise interest rates, although it won't be soon,” she said in an interview at her Frankfurt office last week. I'm quite relieved by these expectations.”

The hawkish German official has expressed interest in possibly succeeding Christine Lagarde as ECB president in the future. She believes that the risk of the economy and inflation is biased upward, suggesting that new growth forecasts may be raised at the December meeting. Analysts expect deposit interest rates to remain unchanged at 2% for the fourth time.

Schnabel is the first ECB policymaker to state with any certainty that the cost of borrowing is not only in a “good position” (as Lagarde and others have repeatedly emphasized), but that it has already hit a “lower limit.”

Although many members of the Governing Council believe that the ECB's next move may be in either direction, and some do not rule out continuing to cut interest rates based on the eight interest rate cuts that have been implemented so far, her position highlights the different situation of the world's major central banks: the US and the UK are still dealing with more stubborn inflation and are therefore in a pattern of cutting interest rates.

Schnabel's confidence stems from Europe's good performance in dealing with tariff turmoil caused by US President Donald Trump. Consumers are benefiting from rapid wage growth and unemployment rates close to historic lows. At the same time, favorable financing conditions and a boom in competition for the adoption of artificial intelligence technology have boosted investment.

“In the face of the biggest disruption to the international trade order since World War II, the resilience of economic growth far exceeded expectations,” she said. “The survey showed that the economy will “expand steadily” until the end of the year. One reason why the impact of tariffs was weaker than expected is that uncertainty is falling very fast.”

The ECB's previous predictions suggest that growth will slow to 1% next year and then pick up again in 2027. Schnabel said “the future has become brighter” since then. Last Friday's data already showed that the third quarter's performance was better than initially anticipated.

ECB observers will pay close attention to the inflation portion of its forecast, which will include 2028 for the first time, to assess whether falling below the 2% target will be worse than previously anticipated. One major concern is a possible delay in the EU's carbon pricing system, which could drag down the economy in 2027.

Schnabel mitigated such concerns. She believes that as long as there is no indication that inflation will continue to deviate from target, the ECB can tolerate “moderate deviation from target.”

“It's important not to stick to any specific numbers,” she said. What really matters is the overall macroeconomic narrative, which tells you how the economy and inflation will evolve over time.”

According to Schnabel, although inflation is currently “in a good position”, service prices are still the “most important” challenge, which is due in large part to rising wages.

Meanwhile, due to a stronger euro, cheaper energy prices, and possible changes in trade routes from China, the downward pressure on commodity prices was milder than feared.

“This means that while the economy is recovering, the output gap is narrowing, and fiscal policies are being expanded, the decline in core inflation has stalled. All of these factors tend to drive up inflation,” Schnabel said. This has to be monitored very carefully.”

Schnabel declined to comment on analysts' predictions about the timing of next interest rate action, and some are betting that interest rates will be raised as early as June.” “It's not something we're considering right now,” she said. The boat is naturally straight to the bridge.”

Looking ahead, she emphasized that the ECB must pay close attention to whether long-term phenomena — such as changes in economic potential and the impact of artificial intelligence — will make otherwise appropriate monetary policy settings too loose.

“We have to monitor whether our policies become more relaxed over time, or even too loose, and then we need to consider adjusting interest rates again,” Schnabel said.

Speaking about the ECB's balance sheet, she said that the process of allowing bonds not to be renewed after maturity is progressing “smoothly”, and that the stability of interest rates in the money market indicates that excess liquidity is still “sufficient.”

This is in contrast to the situation in the US, where the Federal Reserve stopped shrinking its balance sheet this month. Although analysts predict that the ECB may follow suit in the second half of next year, Schnabel said it would be difficult to make any such predictions.

“This roughly corresponds to one end of our forecast range,” she said. The other end of the range is much later.”

Schnabel said that although the evaluation of the ECB's future operating framework will begin next year, it may not be completed until 2027.