Schnabel calls for ECB to keep interest rates unchanged as economy holds steady in the face of tariffs

The European Central Bank should keep interest rates steady as the euro zone economy is holding steady in the face of U.S. tariffs and inflation could still be higher than expected, ECB policymaker Isabel Schnabel told Reuters.

The central bank of the 20 countries sharing the euro ended a year-long easing cycle in July and officials are now waiting to see the full impact of U.S. tariffs agreed in July before deciding whether borrowing costs need to fall further.

Schnabel said he doesn't see the need for further cuts and that the current 2% interest rate may be "slightly" stimulating an already dynamic economy.

"I believe we are perhaps already slightly accommodative and therefore I see no reason for a further rate cut in the current situation," the German economist said in an interview.

The ECB is expected to keep interest rates unchanged at its next meeting on September 11, but investors see a good chance they will be cut again by June, according to money market data. Sources also told Reuters that discussions on further easing will likely resume later.

The Federal Reserve, under pressure from US President Donald Trump, is expected to cut interest rates this month.

However, Schnabel said the eurozone economy had performed better than expected thanks to "robust domestic demand growth," and was now poised to receive a "significant fiscal boost" from Germany's investment in infrastructure and the military.

Contrary to many of his peers and the ECB's own projections, Schnabel argued that the trade tariffs imposed by the Trump administration will increase inflation even without retaliation from the European Union.

"I continue to believe that tariffs are net inflationary," Schnabel said. "If there is a rise in input prices worldwide due to tariffs, and they ripple through global production networks, that will increase inflationary pressures everywhere."

She also said the tariffs will affect supply chains, citing as examples China's export restrictions on several rare earths and the US decision to tax even small-value packages.

This, coupled with rapidly rising food prices, has Schnabel seeing "the balance of risk tilted to the upside," meaning inflation could surpass the ECB's projections of 1.6% next year and 2% in 2027.