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(Bloomberg) — The European Central Bank will probably have to increase borrowing costs further to tame price pressures, Executive Board member Isabel Schnabel told Die Zeit newspaper.
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“From today’s perspective, we will need to continue raising interest rates in order to bring inflation back to our target of 2% in the medium term,” the German official said in an interview published Wednesday.
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Schnabel, who’s seen as the most hawkish Governing Council member, said the “extent and timing of further measures will depend on how the conflict, the economy, and inflation evolve.”
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While the prospect of an enduring US-Iran peace deal has brightened the outlook, “the ceasefire is no reason for monetary policy to let its guard down,” she said.
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Officials hiked rates this month for the first time since 2023 to prevent energy-driven inflation from broadening and becoming persistent. Since then, however, progress in peace talks has sent oil prices markedly down.
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“Energy prices have fallen, but they are still significantly higher than they were before the war,” Schnabel said. “We are paying particular attention to energy prices for future deliveries over the next few years. And those prices remain elevated.”
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Most investors and economists expect at least one more quarter-point increase that would bring the deposit rate to 2.5%.
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President Christine Lagarde this week said that the ECB is ready to adjust its response as the shock evolves, though for now she sees no evidence that would warrant “a more forceful policy response.” Chief Economist Philip Lane warned that despite progress in the Middle East price growth risks staying above the 2% target “for quite some time.”
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Schnabel, who thinks current rates still aren’t restrictive, highlighted that euro-area inflation data for May already showed that the energy shock has spread. While there are no signals yet of second-round effects, their probability is increasing, she said.
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She also stressed that “the economy is relatively resilient despite the major energy-price shock.” According to ECB projections, “the loss of growth is not as severe as one might have expected.”
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—With assistance from Alexander Weber.
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English (US)