ECB’s Schnabel Warns Against Further Rate Cuts Amid Inflation Risks

European Central Bank (ECB) board member Isabel Schnabel cautioned against additional interest rate cuts, warning that inflation could exceed the ECB’s 2% target in the medium term due to rising global price pressures. Speaking at a Stanford University conference on Friday, Schnabel, known for her hawkish stance, said the current rates are already neutral and supportive of economic activity.

The ECB has cut interest rates seven times over the past year in response to falling inflation, and markets expect another cut on June 5, which would bring the deposit rate down to 2%. However, Schnabel argued that maintaining current rates would offer a more prudent path given the evolving economic landscape.

“Now is the time to keep a steady hand,” she said, emphasizing that monetary policy should account for its delayed impact on the economy. While near-term inflation could temporarily dip below the ECB target due to factors like lower energy prices, weak growth, and a strong euro, Schnabel stressed that medium-term risks are skewed to the upside.

Key inflationary pressures include a surge in government spending, particularly in Germany’s defense and infrastructure sectors, and global trade fragmentation triggered by U.S. tariffs. These tariffs, even without European retaliation, could raise production costs across global supply chains, potentially driving inflation higher in the euro area.

Schnabel challenged the view that U.S. tariffs would be deflationary for Europe, suggesting instead that they might add to inflation through cost-push shocks. Any EU retaliation, she noted, would only intensify this effect.

Schnabel concluded that keeping rates steady would act as a safeguard, offering flexibility to respond to a range of future economic scenarios.