In an interview, Isabel Schnabel, Member of the Executive Board of the European Central Bank, argued that estimates of the natural rate of interest (R*) are too uncertain to guide near-term monetary policy decisions and said the ECB is approaching a point where it may need to pause or halt rate cuts as the degree of restriction fades. She pointed to wide confidence bands in ECB staff work on R*, noting that estimates depend heavily on model choice and other uncertainties, and highlighted that the estimated range in the third quarter of 2024 extended up to 3%, above the current 2.75% deposit facility rate. Schnabel said the longer-term signal is an upward shift in R*, driven by factors including high and rising public debt, large investment needs for the digital and green transitions, and global fragmentation that could reverse parts of the global savings glut. On the current stance, she cited the euro area bank lending survey as evidence that rate restraint has eased materially, alongside December loan growth of 1.5% for corporate loans and 1.1% for mortgages, and noted that the ECB’s 125 basis point reduction in the deposit facility rate over the past eight months has passed through to lower bank lending rates, even as strong risk appetite and a large monetary policy bond portfolio have limited tightening in broader financial conditions. On the ECB’s strategy review this year, Schnabel argued for keeping the symmetric 2% inflation target while reassessing the reaction function to better reflect risks of de-anchoring in both directions and the likelihood of more supply-side shocks. She also called for closer scrutiny of the costs and benefits of tools such as asset purchases and forward guidance, and for greater use of scenario analysis to better communicate uncertainty; she indicated the next meeting should discuss whether to retain language describing policy as restrictive.
European Central Bank 2025-02-19
European Central Bank's Schnabel says R* is unreliable in real time and flags that rate cuts may need to pause as policy becomes less restrictive
Isabel Schnabel of the European Central Bank (ECB) highlighted the uncertainty of the natural rate of interest (R*) estimates, suggesting they are unreliable for guiding near-term monetary policy. She noted that the ECB might soon need to pause rate cuts as the restrictive impact diminishes, with R* estimates potentially exceeding the current 2.75% deposit facility rate. Schnabel also advocated maintaining the 2% inflation target and reassessing the ECB's reaction function to address risks of de-anchoring and supply-side shocks.