The interest rate cut threshold dispute tears apart the European Central Bank, with doves warning that "growth drags down inflation" and hawks rebutting that "economic resilience still exists."

According to the Zhitong Finance APP, recently, European Central Bank officials have shown differing views on interest rate policy. Fabio Panetta, a member of the Governing Council, believes that if economic growth falls short of expectations and excessively lowers inflation, further rate cuts should be considered. In contrast, Isabel Schnabel, a member of the Executive Board, emphasized that the threshold for rate cuts is extremely high and should only be considered when inflation significantly deviates from the target, stating that the current interest rates are appropriate and the economy is resilient. It is worth mentioning that both acknowledged the need to make decisions based on economic and inflation trends, but they have different views on the necessity of easing.

Dovish Panetta: Further rate cuts should be made if weak growth drags down inflation

Fabio Panetta, Governor of the Bank of Italy and a member of the European Central Bank, stated that if economic expansion falls short of expectations, leading to excessive downward pressure on inflation, the European Central Bank should further lower interest rates. In his speech on Friday, he reiterated: "If the downside risks to growth exacerbate the trend of slowing inflation, continuing to implement monetary easing would be appropriate."

Panetta's remarks did not suggest that the European Central Bank needs to take action at the meeting on July 24. Currently, the market generally expects that ECB officials will maintain borrowing costs at this meeting.

Policymakers are about to pause a year-long rate-cutting campaign. During this year, the deposit rate has been cumulatively reduced by 200 basis points to 2%. One important reason for pausing rate cuts is the uncertain outlook for trade relations between Europe and the United States, while the conflicts in Ukraine and the Middle East have exacerbated this uncertainty.

Investors still expect another rate cut before the end of the year. Panetta promised that officials would maintain a "flexible and pragmatic" attitude, making decisions based on existing information and its impact on the inflation outlook, according to specific circumstances. He used the ECB's phrasing, stating that he and his colleagues are "in a favorable position to prudently weigh the next steps."

He stated: "The current core issue is whether the current level of interest rates is sufficient to keep inflation close to the target and avoid long-term deviations in either direction."

Additionally, Panetta mentioned the opportunities and risks of technological investment in the banking sector. He pointed out that technological investment is a "decisive strategic lever" for the banking industry, and over the past decade, the proportion of investment in technology and service digitization in the banking sector has increased by about 2 percentage points.

However, he also noted that while new technologies bring significant opportunities, they also harbor risks, prompting the Bank of Italy to strengthen its supervision of financial intermediaries and their suppliers. Regulatory actions have revealed many common issues, including low participation of corporate institutions, incomplete IT asset inventories, and inadequate access control to sensitive data.

Panetta stated that outsourcing is one of the areas with the most prominent issues and added that the Bank of Italy has urged banks to strengthen the management of specific risks related to outsourcing.

Hawkish Schnabel: Economic resilience remains, high threshold for rate cuts

Meanwhile, Isabel Schnabel, a member of the Executive Board of the European Central Bank, expressed hawkish views, becoming one of the strongest voices against the continuation of the year-long easing policy. She stated that further rate cuts are only possible if inflation experiences a significant decline; she also dismissed concerns about the economy falling into distress.

She believes that the current interest rates are "at an appropriate level," the process of inflation slowing is basically in line with expectations, and the economy is demonstrating resilience amid uncertainty In an interview on July 9, she stated, "The threshold for another rate cut is very high. Further rate cuts should only be considered when there are significant signs of inflation deviating from the inflation target in the medium term, and I do not see such signs at the moment."

Given that inflation is close to the 2% target, the European Central Bank plans to keep interest rates unchanged at its meeting later this month. Although officials have not completely ruled out the possibility of further rate cuts, most have indicated that they need to observe economic trends before making a decision.

Some officials, including Bank of Finland Governor Olli Rehn and Bank of France Governor François Villeroy de Galhau, are concerned that if the euro continues to strengthen against the dollar, inflation may fall below the target. Additionally, French Prime Minister François Béru criticized the European Central Bank on Thursday, stating that it should take more measures to support the economy.

Schnabel believes, "In the medium term, the risk of inflation remaining persistently below the target does not exist. Core inflation is expected to remain at target levels throughout the forecast period. Low energy price inflation may be temporary, and the downward pressure on potential inflation from currency appreciation has been exaggerated."

Most policymakers believe that the current 2% deposit rate is in a "neutral range," neither suppressing nor stimulating economic activity. However, Schnabel questioned this, citing the rise in mortgage demand as an example, stating that current rates are "tending towards being accommodative."

Austrian National Bank Governor Robert Holzmann also commented this week that the European Central Bank does not need to continue easing, as current borrowing costs "are likely already in an expansionary range."

However, Holzmann and Schnabel are the most hawkish representatives on the 26-member governing council, while other members still believe there is room for further easing.

One major uncertainty facing the European economy is its trade relationship with the United States. Donald Trump is pushing forward with his aggressive tariff policies, which are set to take effect in August. The EU is seeking to maintain the current 10% tariff, and the results of negotiations between the two sides are expected to be announced soon.

Schnabel stated that if the outcome of the negotiations aligns with the European Central Bank's benchmark forecast released in June (i.e., tariffs remain unchanged), the economy will operate as expected. She said, "In the short term, tariffs will suppress economic activity. But if the negotiations are successful and uncertainty decreases, it will benefit consumption and investment."