Peace Deal Doesn’t Restore Pre-War Situation, ECB’s Schnabel Says

Isabel Schnabel Photo by Matt McClain /Photographer: Matt McClain/Bloom

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(Bloomberg) — Peace efforts in the Middle East have helped bring energy prices down rapidly but haven’t restored the position the world was in before hostilities erupted, according to European Central Bank Executive Board member Isabel Schnabel.

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“Does the decline in oil prices mean that we are back to the pre-war situation? I don’t think so,” the German official said on a panel on Monday in Rome. “The peace deal is still fragile. Markets continue to point to higher oil prices over longer horizons. Gas prices are still around 40% higher than before the war.”

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The shock caused by the US-Iran conflict can’t simply be looked through, she reiterated, warning that pipeline and supply-chain pressures are still elevated.

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Officials like Schnabel insist price pressures are still unfolding, threatening to bolster wages as well as food and services costs in the months to come. But with oil prices sinking and inflation easing faster than expected, doubts are emerging over whether the ECB will add to June’s hike in interest rates.

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Traders have pared bets on more tightening this year, after some policymakers signaled that the worst of the shock may be over. Speaking at the same event, Belgian central-bank chief Pierre Wunsch reiterated that while he’s not excluding another hike, the backdrop is decidedly calmer.

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“It seems that the shock has disappeared and, according to the markets, that oil and gas prices would go back to initial levels, even maybe to below initial levels relatively soon,” he said.

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“If the origin of the shock disappears before you have significant second-round effects — and we haven’t seen that much so far, and especially the wage developments seem to be quite benign — that would point to a monetary-policy reaction, maybe we need to do more, but that doesn’t ask for a tightening that would be significant.” 

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Schnabel, in contract, cautioned on dangers still ahead.

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“Energy and inventories will need to be refilled,” she said. “While euro-area headline inflation has come down from its peak, core inflation has reacted much less and its momentum remains strong.”

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Schnabel also warned of new shocks including Europe’s heat wave, low water levels on the river Rhine and an AI investment boom that’s “supporting global demand and adding to inflationary pressures.”

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(Updates with Schnabel comments in last paragraph.)

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