The European Central Bank (ECB) is preparing for its own important meeting today. Isabel Schnabel, a prominent hawk inside the bank, is poised to take on a leadership role in those conversations. The ECB is anticipating a hawkish turn come the next monetary policy meeting. Schnabel is optimistic about the market’s consensus on an imminent rate increase, however she reiterated several times that any changes would not be immediate. We will host this meeting virtually on Thursday. The biggest bone of contention, as is often the case, will be the bank’s growth projections over the next few years.
Schnabel’s comments underscore the tension the ECB will have to navigate between reining in inflation and nurturing stable economic growth. Swaps indicate that investors are putting more odds on a rate increase by the end of 2026. This trend is a testimony to their hopeful optimism about the market. Schnabel emphasized that she is very much OK with these expectations. As she pointed out, there’s little political will for dramatic changes in policy right now.
The ECB’s latest full set of economic forecasts gives a rather stark picture. Rounded down, the growth projections are 1.2% for 2025 and 1% for 2026. Curiously, looking out to 2027, we see a modest rebound, with growth expected to be 1.3%. These figures establish a picture of a gradually improving economic outlook that might complicate the ECB’s interest rate decision-making process.
Market participants have been counting on the revisions to the administration’s rosy growth projections. All of these updates will be front and center during Thursday’s meeting. These changes would uncover important information about the future direction of ECB monetary policy. This knowledge will help them better address future economic crises.
As discussions proceed, Schnabel’s position will be the most closely watched. He is easily the most powerful and vocal advocate for a tighter monetary policy. Her surprising views may have great weight within the ECB. Her comfort level with future increases suggests that she is willing to act to address implications of the evolving economy. Yet, between the lines, her caution indicates that the ECB is not blinking on the broader macroeconomic picture and possible ramifications for growth.