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Isabel Schnabel: Warning against cutting interest rates too quickly

Photo: Andrew Caballero-Reynolds / AFP

High interest rates are a problem in times of weak economic activity. The monetary policy of the European Central Bank (ECB) is followed correspondingly closely. ECB board member Isabel Schnabel has now spoken out against rapid interest rate cuts in the euro area. In an interview with the Financial Times, the central banker said that the ECB should proceed “patiently and cautiously” when easing monetary policy.

Schnabel pointed to continued inflation in the services sector, a resilient labor market and geopolitical tensions in the Middle East. "All of this taken together speaks against an early adjustment of the political course."

In addition, experience has shown that inflation can rise quickly again, said Schnabel: “I'm not saying that inflation will flare up. That is not my starting point, but I think we should be prepared for this risk. This is an argument against a hasty adjustment of the monetary policy course.

In order to curb the temporarily very high inflation, the ECB has increased key interest rates in the euro area ten times in a row since summer 2022. The deposit rate that is relevant on the financial market is now 4.0 percent - the highest level since the beginning of the monetary union in 1999.

Why high interest rates are a problem

Higher interest rates make loans more expensive, which can slow down demand and counteract high inflation rates. However, because rising loan interest rates also make investments more expensive and this can slow down the currently weakening economy, calls for interest rate cuts have recently become louder.

In January, inflation in the currency area weakened to 2.8 percent. The ECB is aiming for a rate of two percent in the medium term. In 2022, inflation in the common currency area temporarily rose above the ten percent mark.

»We have made significant progress and that is good news. But we're not there yet," said Schnabel, who has spoken out against rapid interest rate cuts several times.

From Schnabel's point of view, the final steps in the fight against inflation are particularly difficult, as she confirmed in the interview: "We are observing a slowdown in the disinflation process, which is typical for the last mile." This is closely related to the dynamics of wages , productivity and corporate profits.

Price expectations in the services sector have risen for several months in a row, and inflation in services is stubborn, said Schnabel. The labor market is resilient. At the same time, there was a notable easing of financing conditions as financial markets aggressively pushed for a change in monetary policy.

Schnabel also mentioned the recent tensions in the Red Sea, which had raised fears that supply chains would be disrupted again.

mmq/dpa/Reuters