European Central Bank Executive Board member Isabel Schnabel has cautioned that price pressures could be more significant than anticipated, even with the potential reopening of the Strait of Hormuz following a US-Iran peace deal.
Schnabel, speaking at an event in Germany on Saturday, stated that "there are upside risks to food, goods, and services inflation," adding that "an energy price shock could amplify broader inflation dynamics."
While welcoming the recent decline in energy prices linked to the prospect of a peace agreement, Schnabel warned that this is not a reason for complacency.
She noted, "Uncertainty remains high, but the announced peace deal reduces the likelihood of a negative scenario." However, she indicated that oil prices are expected to remain elevated, as the reopening of the Strait of Hormuz would need to be implemented gradually.
Schnabel, viewed as one of the most hawkish members of the Governing Council, reiterated that "the ECB is expected to raise interest rates further to bring inflation back to 2% over the medium term."
She added, "Consumer inflation expectations have increased, although there are no signs of wage increases yet."
Other key points from Schnabel's remarks included:
"The energy shock has hit the euro area particularly hard, though not to the same extent as previous oil price shocks."
"Staff projections anticipate a slowdown in euro area growth and higher inflation due to the war in Iran."
"Rising energy costs are dampening consumer confidence and private consumption."
"Higher energy prices have knock-on effects, which are exacerbated by supply chain pressures."
"Producers will pass on some of the higher input costs to consumers, especially in manufacturing."
"Government investment and the global AI boom are providing support for economic growth."
"The labor market remains resilient, with tight supply even as demand for labor cools."
"Elevated valuations for risk assets and increased leverage are contributing to heightened financial stability risks."
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