Interview with Bloomberg

Interview with Isabel Schnabel, Member of the Executive Board of the ECB, conducted by Jana Randow and Mark Schrörs on 3 December 2025

8 December 2025

What do you make of the most recent data on growth and inflation? And how do you assess the risk to economic activity and prices at the moment?

The euro area economy has been much more resilient than could have been expected in the face of the greatest disruption of the international trade order since the Second World War. We upgraded our growth projection for 2025 in the course of this year and incoming data suggest continued growth in the fourth quarter. The European Commission’s Economic Sentiment Indicator stands at its highest level since April 2023, and the Purchasing Managers’ Indices point to a solid expansion, driven mainly by services while manufacturing remains sluggish.

So, the euro area economy is on course to grow above potential despite the headwinds. Weak net exports have been more than compensated by strong domestic demand. One important driver is the robust labour market with low unemployment and strong wage growth, which is supporting private consumption. Another driving factor is fiscal policy, which is now starting to expand. We are seeing the first spending under the German special fund for infrastructure and climate neutrality, and we also see an increased commitment among European countries to spend on defence. And finally, private investment is supported by favourable financing conditions and by a pick-up in AI-related activities.

Overall, the outlook has brightened and the downside risks to growth have been reduced significantly.

How do you assess uncertainty? It’s been an important drag on growth over the past couple of quarters. Has it diminished, also with the recent trade agreements?

One reason why the impact of tariffs has been milder than expected is that uncertainty has come down quite quickly. This should further support future economic activity, both domestically and externally. We are seeing that the global economy and global trade have proven to be more resilient, which also reflects the decline in uncertainty. It seems that everybody is adjusting to the new global trade system, with new trade patterns replacing old ones, supported by new trade agreements.

You said that some of the downside risks to growth have decreased significantly. Does that mean that risks are already balanced or even tilted to the upside?

Compared with our September projections, the risks are clearly tilted to the upside. And while I have not yet seen the new projections due for release later this month, I would expect them to reflect this.

And what about inflation?

Inflation is in a good place. It’s currently around 2%, and we also project medium-term inflation to be around 2%. Looking ahead, volatile energy prices and related base effects may push headline inflation temporarily below our target. Uncertainty about the timing and the impact of the EU Emissions Trading System 2 (ETS2) will contribute to that volatility.

But what matters for monetary policy is the medium term, and underlying inflation is the best predictor of future price pressures. Looking at underlying inflation, I still see some challenges. The most important one is services inflation, which is closely connected to our domestic economy. Services inflation has been much stickier than expected. It still stands well above the pre-pandemic average.

One of the main drivers is stronger than expected wage growth. While negotiated wage growth has come down notably, largely driven by base effects caused by one-off payments in the previous year, compensation per employee has decelerated less than we expected. And our surveys show that wage growth expectations have risen, even if the downward trend remains intact. On top of that, wages are affected by demographic factors, namely that many baby boomers are retiring while immigration has slowed.

But goods inflation is still low and well below 2%.

The downward pressure on goods inflation due to a stronger euro, lower energy prices and potential trade diversion from China has been weaker than expected, and non-energy industrial goods inflation has stabilised around the pre-pandemic average.

Taken together, this means that the decline in core inflation has stalled at a time when the economy is recovering, the output gap is closing and fiscal policy is expanding, all of which would tend to be inflationary. This has to be monitored very carefully.

Food price inflation has come down but remains elevated. And central banks tend to be concerned about persistently high food inflation because it has a strong impact on consumer inflation expectations. Our Consumer Expectations Survey shows that inflation expectations, across all horizons, are higher now than a year ago.

So all in all, inflation is in a good place, but risks to inflation are tilted to the upside.

The September projections showed inflation undershooting the target next year and in 2027. The ECB is now adding 2028. Which number is the one that you will take most interest in?

It’s important not to pin things down to any particular number. What really matters is the overall macroeconomic narrative, which tells you something about how the economy and inflation are going to move over time. We have always said that we can tolerate moderate deviations from target as long as there’s no indication that these deviations will become sustained. And that would also be reflected in inflation expectations. This is why we are looking so carefully at those expectations.

You’re basically saying the ECB can look through special effects in the short or even medium term, given the overall trend of the economy that you’ve outlined?

Let’s face it, the deviations that we are talking about are very small. A couple of years ago we saw deviations of completely different magnitudes. And it’s not sufficient to just look at the numbers. If there is a deviation we need to analyse the reasons for it and see if there’s a risk that it might become sustained. And that of course applies in both directions, given our symmetric inflation target.

So if the December projections were to show inflation below 2% in 2026 and 2027, also because of a delay of ETS2, that wouldn’t be a concern for you? You don’t see a risk of a more permanent undershoot?

Assuming these deviations were small, I would not be concerned in the current macroeconomic environment.

The very obvious next question then is: where are we in the policy cycle? Has the rate-cutting cycle come to an end?

Interest rates are in a good place, and in the absence of larger shocks, I expect them to stay in this place for some time. The distribution of inflation risks has shifted to the upside, and accordingly, both markets and survey participants expect that the next rate move is going to be a hike, albeit not anytime soon.

Now we must focus firmly on the medium term and we have to ask ourselves whether the degree of accommodation or restrictiveness is the right one for the given macroeconomic environment.

I believe that we could see an increase in the natural rate of interest, related to what’s happening in the area of AI and with regard to public investment. Of course, we don’t have a tool to estimate r* precisely in real time. But if it were to increase, a constant policy rate would lead to more accommodation unless inflation were to drop at the same time to the same degree. We have to monitor whether our policy becomes more accommodative over time, and potentially too accommodative, which would then be a time to think about another rate move.

So do the expectations for the next move to be a hike feel right? Would you agree with those expectations?

I’m rather comfortable with those expectations.

Some economists have pencilled in a first hike for June 2026. A majority sees it by the end of next year. Does that sound reasonable?

At this point in time this remains very uncertain. This is not currently on our minds. We’ll cross that bridge when we come to it.

You said in August that global rate hikes may come earlier than many people think. Is that still something you believe in?

If the economy is proving more resilient and demand is recovering more quickly than expected, this would also tend to bring forward the potential need of a rate hike.

In the United States, expectations are for more easing under a new chair of the Federal Reserve. How is that going to filter into financial markets, not just in the United States but also globally? How do you expect that to affect your policy stance?

If the Fed under a new chair were to lower rates more aggressively than already priced in, this would have an impact on the exchange rate and it would also be likely to affect longer-term rates and inflation in the United States. And those also tend to have global spillovers. But a change in the monetary policy stance of the United States would not have a direct effect on the ECB because we run our monetary policy independently, based on our own data and our own analysis. And we have proven many times that there can be divergence in monetary policy globally. But these factors would of course feed into the data that we look at.

When do you expect banks to turn to the ECB’s regular refinancing operations for a more substantial part of their funding?

Our balance sheet normalisation – what I call quantitative normalisation, or QN – has been progressing smoothly. Banks have very high liquidity ratios and yields are not far from where they were when we started the runoff of our monetary policy bond portfolios. Unlike in the United States and the United Kingdom, we have not yet seen any significant moves in money market rates, suggesting that in the euro area, excess liquidity is still abundant.

It’s hard to predict when that is going to change. QN continues to run smoothly in the background, and eventually excess liquidity is going to diminish to a point when it becomes less ample. A welcome feature of our demand-driven framework is that the system adjusts endogenously. Once money market rates move up, it becomes more attractive for banks to access our operations. So, over time, repos with the Eurosystem will become an integral part of banks’ liquidity management and the main asset on our balance sheet, while the monetary policy bond portfolios will be run down completely unless there is another big shock.

Bloomberg Economics calculates that liquidity might already become less ample as early as in the second half of 2026. Is that in line with your estimates?

That broadly corresponds to one end of our range. The other end of the range is much later. We cannot rule out any scenario but – unlike the Fed – there’s nothing that we really have to do except to remind banks that our operations are there to be used. Through their liquidity demand, banks will determine the aggregate amount of excess liquidity and thereby also the size of our balance sheet.

Once this transition has taken place, the question of structural operations will arise. This is something we are going to discuss in the next review of our operational framework, which is going to start in 2026.

Do you expect to finish next year as well?

That remains to be seen.

Is it possible to break down banks’ liquidity needs into structural, operational and other needs?

It is easy to identify the autonomous factors and minimum reserve requirements. According to our announcement, the structural operations will make a substantial contribution to those structural liquidity needs. But we also know that, due to changes in liquidity regulation after the global financial crisis, the demand for liquidity may be structurally higher.

Would you consider those liquidity needs to be a part of the structural financing needs as well?

We will have to discuss that.

The Deutsche Bundesbank has said that structural refinancing operations could cover the bulk of the region’s liquidity needs in the coming years, downplaying the envisaged structural bond portfolio. Do you agree?

That’s a question to be decided by the Governing Council. But I think there are good reasons why structural liquidity should be provided by both structural refinancing operations and a structural bond portfolio. When you run refinancing operations, you encumber a lot of collateral and that is one reason why you may also want to have a structural bond portfolio.

But that portfolio would look quite different from the quantitative easing (QE) portfolios that we are still holding, and in any case it would only be built up once the still very large monetary policy bond portfolios have come down significantly.

Speaking of bonds, some companies are seeing lower bond yields than their country’s government. Is that the new normal we need to get used to?

A recent ECB study shows that, in the euro area, corporate bond spreads are driven to a large extent by firm-specific factors and not so much by country factors, which seems to suggest that our corporate bond market is more integrated than we may have thought. That could lead to a situation where the corporate bond has a yield that is lower than that of the country where the firm is based because the national sovereign is no longer the correct benchmark. That’s good news from the perspective of European integration.

How much concern about debt sustainability is reflected in what we see?

We are seeing public debt rising in many places. It’s crucial to recognise that public debt sustainability hinges not only on the indebtedness of a country and the level of interest rates, but also on the growth performance. What really matters for debt sustainability is whether borrowed funds are used wisely to foster potential growth because growth creates fiscal space. And as long as an economy grows faster than the level of the interest rate, debt sustainability is less of an issue even without budget surpluses.

The German Government has been criticised for how it’s planning to spend money raised for infrastructure and defence. Do you have a view on that?

I will not comment on specific decisions the German Government has taken. But it is clear that the impact of fiscal spending will very much depend on the composition of that spending.

The money as such will give an impulse to the economy, but the multipliers and the impact on potential growth will differ depending on how the money is used.

And the impact will certainly be higher if the spending is accompanied by structural reforms, thereby providing a better business environment for firms.

Is it possible to quantify the future impact on growth from AI investments and use cases?

There’s a lot of uncertainty about the impact of AI. We are seeing that momentum in the use of AI is increasing. A recent survey by the European Commission showed that last year some 40% of larger companies used AI technologies, up from 30% a year before. Our corporate telephone survey revealed that firms are making big investments in digital technologies, and that of course includes AI. So in the short term, investment is increasing.

Over the longer term, AI is an opportunity for euro area firms to raise their productivity. But estimates vary vastly, ranging from almost no impact to quite substantial productivity gains. If that were the case, it would also matter for the central bank because that is one factor that can push up r*.

There’s a discussion at the moment about reducing the burden on banks. What’s your view on how much simplification is possible without deregulation?

I’m generally very supportive of the simplification agenda. We have to reduce bureaucracy and eliminate excessive regulation, and that includes the banking sector. But I believe it would be misguided for the EU to succumb to pressure to follow others in loosening bank regulation. We shouldn’t forget that the tighter banking regulation introduced after the global financial crisis has been very successful. We’ve had massive shocks: a pandemic, war in Europe, the steepest hiking cycle in the history of the ECB – all without having a financial crisis. This was due to good regulation and supervision.

That being said, of course there’s scope for simplification. Rules could be harmonised further and the reporting burden on banks can be reduced. But – and this has also been emphasised by Vice-President de Guindos – there are red lines, in particular with regard to bank capitalisation, that should not be crossed.

Even if it means European banks will not be able to compete?

That’s a myth. Our internal analysis shows that current capital requirements have boosted rather than weakened banks’ competitiveness.

There are plans to introduce a euro-backed stablecoin next year. What do you think about these plans, especially in the context of the digital euro?

We are currently witnessing a fundamental transformation of the financial sector, especially due to the tokenisation of financial assets. And we’ve seen strong growth in US dollar-denominated stablecoins. Euro-denominated stablecoins are still in their infancy. But they’re coming – and that’s a good thing.

It’s important to think about the use cases for stablecoins. So far, the main use case has been to access the crypto world, but there are others such as cross-border payments where stablecoins can be very beneficial. Our current system of cross-border payments is highly inefficient and very expensive, so I think stablecoins have something to offer. But there are also some reasons for concern, for example regarding financial stability and monetary sovereignty.

For the euro area, it is unlikely that a stablecoin – possibly even a US dollar one – would be broadly used domestically for payments. For that purpose the digital euro will be dominant, at least for payments within Europe. I don’t see a risk of the digital euro being replaced by stablecoins.

We can’t finish the interview without talking about the revamp of the Executive Board. Lars-Hendrik Roeller, who was an adviser to former Chancellor Angela Merkel, has said it’s time for a German to become ECB president. Could you be that German?

If I was asked, I would stand ready.