ECB’s Schnabel Cautions Against Aggressive Rate Cuts, Calls for Caution

European Central Bank (ECB) Executive Board member Isabel Schnabel has stressed the importance of a “steady hand” in monetary policy, warning that cutting interest rates too aggressively could exacerbate inflation risks in the future.

Speaking at Stanford University on Friday, Schnabel noted that maintaining interest rates at their current levels allows the ECB to strike a balance between supporting growth and employment without overstimulating the economy. “We are in a good position to assess the future direction of the economy and take action if necessary to protect price stability,” she said.

Schnabel pointed to medium-term inflation risks, citing increased fiscal spending and the potential for renewed cost-push shocks, such as tariffs impacting global supply chains, as key factors that could drive inflation higher. These risks come as the ECB has already reduced rates seven times since June, with expectations for additional cuts amid fears of slower growth due to trade disruptions.

While many investors are pricing in further rate cuts this year, Schnabel tempered those expectations. “We need to focus on the medium-term and avoid reacting to short-term developments,” she said. In particular, she highlighted how current economic uncertainty, falling energy prices, and a stronger euro could temporarily dampen inflation, potentially pushing it below the ECB’s 2% target in the short run.

Schnabel cautioned against making policy changes based solely on these short-term developments, explaining that the effects of monetary policy take time to materialize. “Reacting too quickly could mean the full impact of our actions is felt only after the disinflationary forces have passed,” she said.

The ECB board member also discussed the influence of fiscal policy and global trade tensions. She noted that the expansion of public spending, particularly in Germany, could exert upward pressure on inflation over the medium term. Regarding U.S. tariffs, Schnabel acknowledged the uncertainties of ongoing trade negotiations but warned that sustained tariffs could reinforce inflationary pressures, especially when combined with higher fiscal spending.

On the topic of monetary policy tools, Schnabel remarked that asset purchases, or quantitative easing (QE), have been less effective than previously expected, emphasizing that future use of QE should be approached with caution. “The bar for QE should be higher moving forward,” she said, adding that the current policy stance, with rates near neutral territory, is appropriate for now.

Schnabel concluded that the ECB would only need to act more aggressively if there were a significant deterioration in labor market conditions or a breakdown in inflation expectations, neither of which appear likely at the moment.

The ECB’s current deposit rate is 2.25%, which is considered neutral, neither stimulating nor restricting economic activity.