European Central Bank (ECB) Executive Board member Isabel Schnabel stated that the ECB should raise interest rates in June, even if a peace agreement with Iran is reached, as the conflict has lasted longer than initially anticipated and high energy prices are spreading to broader economic sectors. Over the past year, the ECB has kept rates unchanged but discussed a hike last month due to soaring energy costs driving inflation well above the 2% target, with several policymakers signaling the need for action.
In an interview, Schnabel remarked, "Given the scale and persistence of the current shock, in my view, choosing to 'look through' it is no longer an option. Based on the current situation, I believe a rate hike is necessary in June." Despite signals of progress in U.S.-Iran peace talks, Schnabel—a potential successor to ECB President Christine Lagarde—noted that the ECB may have passed a point of no return, as energy infrastructure has been damaged and high energy costs are permeating the wider economy.
"A peace agreement is unlikely to halt the rate hike," said Schnabel, a former university professor. "Even if the war ended today, significant damage has already been done to energy infrastructure and global supply chains. Therefore, even in that scenario, I believe a monetary policy response is warranted." She added, "In terms of persistence, we have moved beyond the adverse scenario previously assumed, where oil prices were expected to normalize quickly."
Last month, inflation reached 3% and may rise further. Policymakers are concerned that high energy costs could push up prices for other goods and services through second-round effects, triggering a difficult-to-control inflationary spiral. Schnabel indicated that some of these second-round effects may already be emerging, as shown by various surveys, including the ECB's Consumer Expectations Survey, PMI data, and the European Commission's sentiment indicators. "We are seeing increasing signs that this shock is spreading to other parts of the consumption basket," she noted.
Schnabel emphasized that after June, the ECB should not commit to any specific policy steps but instead reassess its stance at each meeting based on data. However, she pointed out that the ECB's own baseline projections include two rate hikes, suggesting that a single hike may not suffice. Financial markets have fully priced in two hikes to the ECB's 2% deposit rate, with about a 50% probability of a third move within the next year. A Reuters survey showed economists are more cautious, expecting only two hikes followed by a rate cut in mid-2027.
A key reason for ECB watchers anticipating only modest tightening is the eurozone's weak economic growth, with high energy costs potentially constraining expansion more severely than feared. The European Commission recently forecast 0.9% economic growth for 2026, a sharp slowdown from last year, and this projection may still be optimistic. "Given the high persistence of this shock, I believe the negative impact on growth will also be stronger," Schnabel said. "We have already seen a significant decline in confidence indicators, especially among consumers. All of this implies downside risks to growth and upside risks to inflation."
Schnabel, who oversees the ECB's market operations, noted that financial markets are calmly handling these developments, and recent volatility in government bond yields is not concerning. "The rise in eurozone bond yields is primarily driven by increased inflation compensation," she explained. "This partly reflects a rise in inflation risk premiums due to heightened uncertainty about future inflation prospects."
Regarding her future, Schnabel, whose ECB term ends in late 2027, stated that she would be prepared to assume the presidency if invited.
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