Schnabel believes that interest rates are no longer a relevant factor in European growth

The eurozone's key interest rates are no longer a significant weight on economic growth, says Isabel Schnabel, one of the most hawkish members of the European Central Bank (ECB) board. With the reference rate at 2.75%, the debate within the monetary authority is increasingly leaning towards the terminal rate, with Schnabel signaling that the current level is already close to this concept.

In a speech at a conference held by the Bank of England in London on Tuesday, Schnabel argued that it is “increasingly unlikely that current financing conditions are holding back consumption and investment”, giving yet another sign that he sees the current European monetary stance as non-restrictive. As such, central banks should act “with caution”, he added.

On the other hand, the fact that European economic performance continues to disappoint should not be seen, in itself, as proof that interest rates continue to constrain growth, he stressed.

Tuesday’s comments are in line with the view held by the economist, one of the eurozone’s most aggressive members in terms of monetary policy, that the single currency’s neutral rate has risen significantly since the pandemic. This theoretical concept establishes the level of interest that neither stimulates nor restrains economic activity, with the classic view among analysts and academics being that it will be somewhere between 1.75% and 2.25% in the case of the single currency bloc – a view recently reinforced by a study published by the ECB.

As interest rates fall after the spike caused by the inflationary episode of recent years, the discussion among ECB members is increasingly turning to this neutral rate, something acknowledged by the bank's president, Christine Lagarde, in press conferences following the organization's most recent meetings.

With interest rates currently at 2.75%, the market anticipates further cuts in the next meetings, pointing to a terminal rate of 2% – that is, three more cuts of 25 basis points (bp).

Also on Tuesday, Bundesbank Governor Joachim Nagel asked his counterparts and fellow ECB members to refrain from giving signals about the future of key interest rates in Europe, citing high uncertainty as the main reason. For the German central bank leader, “there is nothing to be gained from public speculation” about monetary policy “given the high level of uncertainty”.

In the same vein, Lithuanian Governor Martins Kazaks found it increasingly difficult to make any kind of projection, given that the US President “comes up with something new every day”. “Of course this increases uncertainty. This affects the economy, inflation and monetary policy”, he said, although he continued to consider that “the direction [of interest rates] is clear”.