ЕCB Hints at an Upcoming Rate Hike: The Euro Reacts

Futures on German bunds are declining while EUR/USD is rising after ECB’s Isabel Schnabel said she is relaxed about bets that the next move will be an interest rate hike. Of course, this is just one voice in the ECB’s large governing body. But the timing of her remarks — just before the opening of European money markets on Monday — amplifies movements in both the currency and bond markets.

ECB Executive Board member Isabel Schnabel emphasized that she is comfortable with investors’ expectations for an upcoming rate hike. She noted that although borrowing costs are already at appropriate levels and could remain so for some time — absent new shocks — consumer spending, business investment, and increased government spending on defense and infrastructure will continue to support economic growth.

“Both markets and survey participants expect the next move in interest rates to be an increase, though not in the near term,” she said in an interview in Frankfurt. “I am completely relaxed about these expectations.”

Schnabel, considered one of the more hawkish voices within the ECB, pointed out that risks to the economy and inflation are tilted to the upside. She hinted that growth projections may be revised upward at the December meeting, where analysts expect the deposit rate to remain unchanged at 2% for a fourth consecutive time.

She became the first ECB official to state so clearly that borrowing costs are not only “in a good place” — as President Christine Lagarde and others have frequently noted — but have also reached their bottom.

While some Governing Council members believe the next step could go in either direction — and some do not even rule out further cuts beyond the eight already delivered — Schnabel’s stance highlights the differences in economic dynamics among major central banks. The U.S. and the U.K. are still in rate-cut mode due to more persistent inflation.

Her confidence also stems from the fact that Europe is coping better than expected with the tariff shocks triggered by President Donald Trump. Consumers are benefiting from rapid wage growth and record-low unemployment, while favorable financing conditions and a strong wave of investment in technology and artificial intelligence are boosting business activity.

According to Schnabel, economic growth “has proven to be much more resilient than one might have expected, given the greatest disruption to the international trade order since World War II.” She cited surveys indicating “solid expansion” toward the end of the year, noting that the impact of tariffs has been weaker than projected, as uncertainty has eased quickly.

The ECB’s latest set of forecasts suggests that growth will slow to 1% next year before accelerating again in 2027. Since then, according to Schnabel, “the outlook has improved.” Data released on Friday already showed better performance for the third quarter than initially reported.

ECB observers will be watching the inflation component of the new projections closely. These forecasts will include 2028 for the first time, allowing analysts to assess whether a potential drop below the 2% target might turn out to be more pronounced than expected. A major concern is the likely delay in the implementation of the EU’s carbon pricing system, which could exert pressure in 2027.

Schnabel downplayed such concerns, arguing that the ECB can tolerate “moderate deviations from the target” as long as there are no signs that they will become persistent.

“It’s important not to fixate on a specific number,” she said. “What matters is the overall macroeconomic narrative that shows us how the economy and inflation are expected to evolve over time.”

While inflation “is currently in a good place,” services prices remain “the most important” challenge — largely due to rising wages, Schnabel added.