European Central Bank (ECB) senior policymaker Isabel Schnabel delivered what one analyst described as a “bombshell” last week. She said euro zone growth risks were now tilted to the upside and that she was comfortable with market bets pointing to the next move in interest rates being a hike rather than a cut.
Her comments reflect the rapidly shifting outlook for interest rates. Only a few months ago markets were expecting more ECB rate cuts, but the rapid reduction in inflation combined with a more positive economic outlook has halted Frankfurt’s rate-cutting cycle.
ECB chief Christine Lagarde said rate-setters would probably lift their growth forecasts for the euro zone when they meet later this week.
Pointing to the ECB’s previous upgrade to the economy’s outlook in September, Lagarde told the Financial Times in an interview last week that “my suspicion is we might do that again in December”.
In September the ECB raised its forecast for euro-zone gross domestic product (GDP) for 2025 to 1.2 per cent, from a prediction of 0.9 per cent in June
While the ECB is not expected to change its monetary stance this week, Lagarde and Schnabel’s comments reflect a shift of focus from inflation to growth.
Following Schnabel’s remarks, Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “The euro barely batted an eyelid to her remarks, as her comments not only triggered a rethink in the rate path in the euro area, but in the rest of the developed world. We will add two caveats to Schnabel’s remarks.
“Firstly, she is widely considered to be one of, if not the most, hawkish member on the governing council, so her views do not necessarily represent the majority of the committee,” he said.
“Secondly, she also noted that any moves higher in rates would not happen for some time. At any rate her communication perhaps tees up the possibility of a ‘hawkish hold’ from the ECB when it next meets a week on Thursday,” he said.
Analysts will be parsing Lagarde’s post-meeting comments on Thursday to see if she also has become more hawkish on rates.
