ECB Hawkish Official Warns: Trade War Could Drive Up Inflation, Limiting Room for Further Interest Rate Cuts

On Friday (May 9) local time, Isabel Schnabel, a member of the Executive Board of the European Central Bank (ECB), warned that a global trade war could drive up inflation in the eurozone, thereby limiting the scope for further interest rate cuts.

As one of the six members of the ECB's Executive Board, Schnabel, whose policy stance leans hawkish, delivered a speech at Stanford University on Friday.

Schnabel stated that the rise in protectionism and the surge in defense spending in Europe, particularly in Germany, meant that policymakers needed to "maintain a firm stance and keep interest rates around current levels."

Since June last year, the ECB has cut interest rates seven consecutive times, reducing the deposit rate from 4% to the current 2.25%.

In her speech, Schnabel said, "If tariffs continue to rise significantly, coupled with the pressure from increased fiscal spending in the medium term, these factors could further push up core inflation."

US President Trump announced the so-called reciprocal tariffs early last month, and subsequently declared a 90-day suspension for most countries and regions, while maintaining a base tariff rate of 10%. The US is currently using this period to negotiate with major trading partners.

As a traditional ally of the US, the EU was subjected to a 20% reciprocal tariff by Trump. European Commission President Ursula von der Leyen said this week that the EU is "preparing for all possible scenarios."

Her remarks challenge the growing dovish consensus among economists and investors that the ECB will cut interest rates by another 25 basis points at its June meeting. Overall, the market expects two to three similar-sized rate cuts before the end of this year.

In fact, Schnabel had already called for discussions on the necessity of pausing interest rate cuts even before Trump announced the reciprocal tariffs.

Some argue that the trade war initiated by Trump could suppress, rather than drive up, consumer price inflation in the eurozone. In this scenario, the ECB should increase the easing of its monetary policy to prevent inflation from falling below the 2% target in the medium term.

However, Schnabel stated that in the medium term, the rise in fiscal spending and the impact of tariffs on supply chains mean that inflation risks are "more likely to be skewed to the upside."

ECB President Christine Lagarde said in April that the "net impact" of tariff wars on inflation would "become clearer over time." She also said at the time that trade disputes constituted a "negative demand shock" that would have "some impact" on economic growth in the eurozone.