“Last mile the most difficult”
ECB Director Schnabel is putting the brakes on interest rates
May 17, 2024, 9:46 a.m
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The ECB’s interest rate turnaround in June is considered certain. However, it is unclear what happens next. Director Isabel Schnabel raises doubts that further interest rate cuts will quickly follow.
The central bankers at the European Central Bank (ECB) have more or less openly announced that key interest rates will fall in June. But what happens next? ECB Director Isabel Schnabel has expressed caution about further interest rate cuts. Depending on the data, a rate cut in June could be appropriate, she said in an interview with the Japanese newspaper Nikkei. After that, however, the path is much less certain and a reduction in interest rates in July is not justified. “Recent data has confirmed that the last mile of the decline in inflation is the most difficult.” After many years of very high inflation, there is a risk of loosening monetary policy prematurely. “We should proceed very carefully,” said the member of the European Central Bank’s six-member leadership team.
In the summer of 2022, the ECB abandoned its long-standing zero interest rate policy in order to get high inflation under control. In a short time, it raised the most important interest rate at which banks can obtain fresh money from the central bank to 4.5 percent.
In April, inflation in the euro zone was 2.4 percent, moving closer to the ECB’s target of an annual inflation rate of two percent in the medium term. At this value, the monetary authorities see price stability guaranteed.
But further progress on inflation is needed to increase confidence that inflation will return sustainably to the ECB’s target of two percent by 2025 at the latest, Schnabel explained. Geopolitical developments such as escalating tensions in the Middle East could pose upside risks to the inflation outlook.
An interest rate cut at the upcoming ECB meeting on June 6th is already considered a foregone conclusion by many monetary authorities, which is why the discussion now primarily revolves around the further path of interest rates. The financial market is currently expecting three interest rate cuts from the ECB this year.