European Central Bank Governing Council member Isabel Schnabel said on Wednesday that interest rates may need to rise further to ensure inflation returns to the 2% target in the medium term.
Speaking in an interview with Bloomberg News, Schnabel noted that with current borrowing costs, inflation is unlikely to stabilize at the ECB’s objective over the medium term. Additional monetary tightening may therefore be required to address persistent price pressures.
Consumer prices are expected to exceed the ECB’s 2% target for a prolonged period, driven largely by elevated energy costs linked to geopolitical risks in the Middle East and the ongoing conflict in Iran. Schnabel emphasized that acting only once inflation feeds into wages would leave policymakers "behind the curve," underscoring the need for preemptive policy action.
The ECB raised interest rates for the first time in nearly three years in June to counter inflation risks stemming from energy price volatility tied to regional conflicts. Schnabel’s remarks suggest that further tightening remains under consideration, particularly ahead of the September policy meeting.
Three sources cited by Reuters on Tuesday indicated that ECB officials were leaning toward another rate hike in September to curb inflation linked to the war in Iran, though they showed little inclination to signal additional tightening beyond that point. Schnabel did not specify the potential magnitude of future rate increases.
Markets appear to have priced in the ECB’s reaction function, with Schnabel stating that investor understanding of policy guidance remains strong.
