Recently, Isabelle Schnabel, a member of the Executive Board of the European Central Bank, has issued a strong warning regarding the ECB's interest rate cut policy, sparking widespread interest and discussion within the financial sector.

Schnabel has made it clear that the current policy interest rate level of the ECB is approaching a neutral level, where it will no longer restrain economic activityShe emphasized that this is a critical point, as further significant interest rate cuts could have severe consequences, potentially wasting valuable policy space.

Since June of this year, the ECB has initiated a series of interest rate cutsThe deposit mechanism rate was reduced from 4% to 3.25%, while the main refinancing rate and marginal lending rate were cut by 110 basis points, currently standing at 3.40% and 3.65%, respectively

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There is a general expectation in the market that the ECB may implement another rate cut in December, with cumulative cuts reaching up to 150 basis points before the end of 2025.

In a recent interview, Schnabel further elaborated on her viewsShe stated that if subsequent economic data aligns with policymakers' expectations, the ECB could adopt a gradual transition towards a neutral policyHowever, she also issued a stern warning against excessively entering the accommodative territoryShe bluntly remarked, “The market seems to believe we need to move to an easing phase, but from today’s perspective, I believe this is not appropriate.” In response to widespread speculation that the ECB might cut rates by 50 basis points in December, Schnabel expressed strong oppositionShe argued that easing monetary policy should be approached graduallyShe explained that while officials could continue to lower rates operationally, they must maintain a high level of prudenceOnce rates dip below the neutral threshold, the ECB could risk lacking effective tools to respond to future economic challenges, such as external shocks and market volatility, resulting in a passive stance.

Schnabel also estimated the neutral interest rate level to be between 2% and 3%, a stance that starkly contrasts with some of her more dovish colleagues at the ECBShe further warned that even when facing potential economic issues leading to inflation levels falling below expectations, overzealous rate cuts could be counterproductiveShe pointed out, “In such a scenario, entering the easing mode could have a higher cost than benefitWe would be utilizing precious policy space that could be more effectively employed when the economy faces shocks in the future.”

Moreover, Schnabel, with her wealth of experience and keen insight, offers a unique interpretation of recent economic data

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After meticulously analyzing a series of key metrics, such as PMI, she believes these figures may exaggerate the extent of weakness in the European economyThrough her rigorous examination, she notes that there are currently no clear and obvious signs indicating that the European economy is at risk of falling into a recessionSchnabel further pointed out that the third-quarter consumption data deserves particular attention, as it has shown several positive signalsThe stable growth of consumer spending and the uptick in certain consumption sectors all indicate that consumption is contributing to the economic recoveryThese data points serve as crucial pieces in the puzzle, strongly supporting her assessment of the current economic landscapeBased on this, she is convinced that the European economy does not need to excessively rely on drastic measures like rate cuts at this stage, advocating for relatively stable policies to sustain economic stability.

Notably, Schnabel’s viewpoint sharply contrasts with that of Italian central bank Governor Panetta, who last week asserted that the ECB should closely focus on the evident weakness presented by the real economyPanetta, after conducting in-depth research and analysis on the current economic situation, firmly believes that there is still a long way to go before the current interest levels reach the neutral rateThis suggests that the ECB must adopt a more expansive monetary policy approachHe argues that through more aggressive rate cuts, financing costs for businesses could effectively be reduced, stimulating investment and consumer spending, thus promoting economic growth and preventing the European economy from falling into a prolonged slump, ultimately achieving robust recovery and sustainable development.