The European Central Bank published an interview with Executive Board member Isabel Schnabel in which she argued that the euro area economy is growing above potential and inflation is around 2%, while the balance of inflation risks has shifted to the upside. Against that backdrop, she expected policy rates to remain at their current level for some time absent large shocks, and viewed market expectations that the next rate move will be a hike, albeit not soon, as broadly appropriate. She pointed to a stronger growth outlook driven by domestic demand, supported by a robust labour market, expanding fiscal spending including initial outlays from Germany’s special fund for infrastructure and climate neutrality and higher defence spending, and private investment linked to favourable financing conditions and AI-related activity, alongside easing trade-related uncertainty. On inflation, she anticipated that energy price volatility and uncertainty over the timing and impact of the EU Emissions Trading System 2 could temporarily push headline inflation below target, but highlighted sticky services inflation and stronger-than-expected wage dynamics as reasons why the decline in core inflation has stalled as the output gap closes and fiscal policy expands; the ECB’s Consumer Expectations Survey shows inflation expectations are higher than a year ago across horizons. On balance sheet normalisation, she described quantitative normalisation as proceeding smoothly with excess liquidity still ample, but expected Eurosystem repos to become an integral part of banks’ liquidity management as liquidity diminishes, with one end of the ECB’s range consistent with conditions becoming less ample as early as the second half of 2026. She also said the next review of the ECB’s operational framework will start in 2026, including discussion of structural operations and the role of a structural bond portfolio, which in her view could complement refinancing operations because of collateral encumbrance and would only be built once existing monetary policy bond portfolios have come down significantly.
European Central Bank 2025-12-08
European Central Bank interview with Isabel Schnabel signals policy rates to stay steady with next move expected to be a hike
European Central Bank Executive Board member Isabel Schnabel discussed the euro area economy's growth above potential and inflation around 2%, with inflation risks shifting upward. She expects policy rates to remain stable absent large shocks, aligning with market expectations of a rate hike. Schnabel highlighted domestic demand, fiscal spending, and private investment as growth drivers, while noting energy price volatility and wage dynamics affecting inflation.