OAT: Options are more active this Week

• On growth, Schnabel joined President Lagarde in noting that the agreed EU-US tariff rates are “not far from our June baseline”, despite the 15% rate being the mid-point of the 10% baseline assumption and the 20% severe scenario assumption. It’s worth noting that early analyst expectations we have seen look for a small downward revision to the ECB’s 2026 GDP growth projection in the upcoming September forecast round.
• Separately, one of Schnabel’s arguments for upside inflation risks focuses on the recent trajectory of food inflation: “Food price inflation is at its highest level since March of last year, partly driven by the occurrence of extreme weather events. Import food price inflation stands at a high level despite the appreciation of the euro”.   She notes that “Food prices are particularly important because they are relevant in shaping households’ inflation expectations”. We don’t have any major qualms with this argument, which is very similar to that of several BOE MPC members currently calling for caution with respect to the “timing and pace” of future rate cuts. 

ECB Executive Board member Schnabel is well known to be one of the most hawkish members of the Governing Council (GC), a view underscored by this morning’s interview with Reuters. While acknowledging her existing stance, we were still surprised by some of the arguments employed in the interview, and question the extent to which these views are supported amongst the wider GC. We think the median GC member is likely better reflected in today’s comments from Simkus, who suggested a rate cut towards the end of this year (i.e. not in September) is still plausible. 

• One of Schnabel’s most hawkish lines of reasoning for upside inflation risks relates to tariffs. She believes tariffs will have a moderate net positive inflationary impact, as:
  • (i) “we are seeing that the impact of uncertainty on demand has been smaller than thought….And of course, uncertainty itself has come down”
  • (ii) “If you have an increase in input prices globally due to tariffs, and these propagate through global production networks, this will increase inflationary pressures everywhere”.
• Schnabel writes that “This is in line with a recent article published by the Bank for International Settlements”. However, the BIS paper we assume she is referencing (here) notes that the inflationary impact of tariffs on non-imposing countries are much “less clear cut” than for the imposing country (i.e. the US). Quantitively, the impact of tariffs on inflation in the BIS report seems extremely small – certainly not overtly inflationary (see image). 

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