Top ECB official sees limited room for rate cuts
The European Central Bank needs to be wary of cutting interest rates too far.
The European Central Bank (ECB) needs to be wary of cutting interest rates too far as borrowing costs are already near a level that no longer restrains the economy and going lower could backfire, according to executive board member Isabel Schnabel.
Officials can continue to loosen monetary policy, but should do so only gradually to avoid taking rates below the so-called neutral threshold, Ms Schnabel said in an interview.
Easing too much could squander valuable policy space, the hawkish policy-maker warned.
“Given the inflation outlook, I think we can gradually move toward neutral if the incoming data continue to confirm our baseline,” Ms Schnabel said in her Frankfurt office.
“I would warn against moving too far, that is into accommodative territory.”
She estimates neutral, which cannot be precisely measured, at 2% to 3%.
With the deposit rate standing at 3.25% following the three quarter-point cuts so far this year, Ms Schnabel said “we may not be so far” from it now.
The remarks feed an intensifying debate about how the ECB should react to a deterioration in the eurozone economy alongside inflation that is approaching 2% more rapidly than previously foreseen.
Discussions over the pace of easing monetary policy are becoming heated, complicated further by heightened global uncertainty — especially from the trade tariffs that will likely accompany Donald Trump’s return to the White House.
