A member of the Executive Board of the European Central Bank (ECB), Isabel Schnabel, believes that additional increases in borrowing costs will likely be necessary to reach the target inflation rate of 2%. “From today’s perspective, we will need to continue raising interest rates to bring inflation back to our 2% target in the medium term,” the German official said in an interview with the newspaper Die Zeit, published on Wednesday.
Schnabel, regarded as the most “hawkish” member of the ECB’s Governing Council, noted that “the scale and timing of further measures will depend on the development of the conflict, the economy, and inflation.” While the prospect of a lasting peace agreement between the US and Iran has improved the economic outlook, “a ceasefire is not a reason for monetary policy to let its guard down,” she added.
Rate hikes and energy prices
This month, ECB officials raised rates for the first time since 2023 to prevent the spread and persistence of inflation driven by energy prices. However, since then, progress in peace negotiations has significantly reduced oil prices.
“Energy prices have fallen, but they are still significantly higher than before the war,” Schnabel said. She emphasized that the ECB is closely monitoring energy prices for future deliveries over the next few years, and these prices remain elevated.
Most investors and economists expect at least one more quarter-point rate hike, which would raise the deposit rate to 2.5%.
Positions of other ECB representatives
ECB President Christine Lagarde stated this week that the bank is prepared to adjust its response as the situation evolves, although it has not yet seen evidence to justify “a more decisive policy response.” Chief Economist Philip Lane cautioned that, despite progress in the Middle East, price growth risks remaining above the 2% target “for a fairly long time.”
Schnabel, who believes that current rates are still not restrictive, emphasized that inflation data in the eurozone for May already indicated that the energy shock has spread. Although there are no signals of second-round effects yet, their likelihood is increasing. She also stressed that “the economy is relatively resilient despite the significant energy price shock.” According to ECB forecasts, “the loss of growth is not as significant as it could have been expected.”
Source: Bloomberg