The European Central Bank (ECB) is moving closer to halting interest rate cuts, as monetary policy may no longer be tight, while rising energy prices are raising inflation risks, ECB board member Isabel Schnabel said.
The ECB has cut interest rates five times since June, and markets expect three more cuts this year as price pressures ease. But more cautious policymakers, like Schnabel, are increasingly calling for a more cautious approach.
“We are getting closer to the point where we may need to stop or pause interest rate cuts,” Schnabel said. “
At a deposit rate of 2.75%, the ECB is now faced with the question of whether monetary policy is still restricting economic activity, while inflation has not yet reached its 2% target.
The ECB has also dropped references to the need to maintain “tight” policy, sparking debate about the true limits of restrictive policy.
“The data shows that the level of monetary tightening has eased significantly, so that it is no longer possible to say with confidence that our policy is still tight,” Schnabel explained.
He also stressed that the neutral interest rate, i.e. the rate that neither hinders nor stimulates economic growth, has probably risen in recent years and is expected to continue to rise due to structural challenges such as high debt and the green transition.
Schnabel also warned that the recent increase in natural gas prices could cause inflation to return to 2% later than the ECB initially expected.
