Monetary policy: ECB Director Schnabel warns against excessive interest rate cuts

ECB Director Isabel Schnabel warns against excessive interest rate cuts in the Eurozone. The European Central Bank (ECB) monetary authorities could loosen monetary policy further, but this should only happen gradually, Schnabel told the Bloomberg news agency. “I would caution against going too far.”

If interest rates fall too much, they could fall below the neutral level, said the ECB director. The neutral level means that the key interest rates neither slow down nor stimulate the economy. Schnabel estimates the neutral level to be two to three percent. “From today’s perspective, I don’t think it’s appropriate to lower interest rates into the accommodative range in which the economy is stimulated.”

Since the interest rate turnaround in July, the ECB has cut key interest rates three times. The benchmark deposit rate on the financial market that banks receive for excess funds parked at the central bank is 3.25 percent. Interest rates are expected to continue falling on the stock exchanges after economic data from the Eurozone recently turned out to be surprisingly weak. The ECB’s next interest rate decision is due on December 12th.

Lively debate about interest rate cuts

ECB chief economist Philip Lane spoke out on Monday in favor of further interest rate cuts to support the economy. “We don’t commit to a precise pace of reduction in advance, but we will have to reduce our interest rates gradually,” Lane told the French financial newspaper Les Echos. In his opinion, monetary policy should not remain restrictive for too long. “Otherwise the economy will not grow sufficiently.”

Bundesbank President Joachim Nagel, however, recently warned again about interest rates falling too quickly. It is still important to be cautious “and to loosen monetary policy only gradually and not too quickly,” he said in Dortmund. The tariff plans of US President-elect Donald Trump could also be reflected in higher inflation here, says Nagel. In addition, it cannot be ruled out that wage growth in the euro zone, which has an impact on the prices of services, will decline more slowly than expected.