European Economy Holds Strong, ECB's Next Rate Cut Threshold "Highly Elevated", Says Schnabel

European Central Bank member Isabel Schnabel says the threshold for another interest rate cut is "very high" as the eurozone economy is performing better than expected and inflation remains anchored at 2%. Schnabel cites stable inflation expectations and favorable interest rates as factors contributing to the high threshold.

European Central Bank (ECB) member Isabel Schnabel has indicated that the threshold for another interest rate cut is "very high," given the eurozone economy's resilience and inflation remaining anchored at 2% [1]. Schnabel, in an interview, highlighted stable inflation expectations and favorable interest rates as key factors contributing to this high threshold.

Schnabel noted that the eurozone economy is performing better than expected, with economic growth in the first quarter of 2025 surpassing forecasts. Additionally, sentiment indicators and manufacturing activity have shown improvement, further bolstering the economy's resilience. The labor market remains strong, with unemployment at a record low and employment continuing to grow [2].

Inflation expectations are well-anchored, with core inflation projected to remain at the ECB's target over the medium term. The low energy price inflation is seen as temporary, and the exchange rate appreciation is not expected to significantly impact underlying inflation. Schnabel also mentioned that the ECB's monetary policy is becoming more accommodative, with bank lending surveys indicating that interest rates are boosting mortgage demand [2].

The ECB member emphasized that the bar for another rate cut is high because of the stable inflation environment and the economy's resilience. She cautioned against making monetary policy decisions based solely on short-term data, such as energy prices, and stressed the importance of focusing on the medium-term outlook and core inflation [2].

Schnabel also addressed the potential impact of tariffs on growth and inflation. She expects a net inflationary effect over the medium term, as the dampening effect from a weaker global economy may be offset by supply-side effects. The ECB member highlighted that the pass-through of the exchange rate appreciation is likely to be limited, as more than half of the eurozone's imports are invoiced in euros [2].

In summary, Isabel Schnabel's assessment underscores the ECB's cautious approach to further rate cuts, given the current economic conditions and inflation outlook in the eurozone.

References:
[1] https://www.rte.ie/news/business/2025/0711/1522994-ecbs-schnabel-sets-bar-very-high-for-rate-cut/
[2] https://www.ecb.europa.eu/press/inter/date/2025/html/ecb.in250711~f6894f868f.en.html